Question

X and Y are interested in organizing a new interior decorating business. X contributed $140,000 for 70% ownership interest and Y contributed $60,000 for 30% ownership interest. The business borrows $80,000 from a bank to pay for startup costs. They both actively manage the interior decorating business. They will not draw a salary, but the plan includes an annual total distribution of $250,000 to X ($175,000) and Y($75,000). X and Y's only source of income and deductions is from their business operations. They are both single.

a. Assuming the business plan projections are accurate in 2017, calculate the federal income tax X and Y would owe in 2017 from the interior decorating business if the business is organized as a general partnership. Please show your work and explain your calculations. Only consider income taxes in computation.

b. Assuming the business plan projections are accurate in 2017, calculate the federal income tax X and Y would owe in 2017 from the interior decorating business if the business is organized as a C corporation (both corporate and individual income taxes) . Please show your work and explain your calculations. Only consider income taxes in computation.

c. Assuming the business plan projections are accurate in 2018, calculate the federal income tax X and Y would owe in 2018 from the interior decorating business if the business is organized as a general partnership. Please show your work and explain your calculations. Only consider income taxes in computation.

d. Assuming the business plan projections are accurate in 2018, calculate the federal income tax X and Y would owe in 2018 from the interior decorating business if the business is organized as a C corporation (both corporate and individual income taxes) . Please show your work and explain your calculations. Only consider income taxes in computation.

e. Should X and Y form their business as a general partnership or C corporation? Consider how tax reform impacts your decision. Briefly explain.

f. List at least 2 non tax considerations X and Y may want to consider when choosing between a general partnership and C coporation.

Answer 1

		X	Y
	Contribution	140,000	60,000
	Share	70%	30%
	Income Distribution	175,000	75,000
a	Federal Income Tax
	2017 tax rates
	10%(0-9325)	933	933
	15%(9325-37950)	4,294	4,294
	25%(37950-91900)	13,488	9,263
	28%(91900-191650)	23,268
	Total	41,982	14,489