Question

§Investor A, a single individual, has $200,000 of taxable income in 2014, 2015 and 2016 before his investment in Entity X. Entity X has an end of year loss in 2014 and 2015 of ($50,000) per year and has profits in 2016 of $300,000.

§What is the tax savings or tax costs on Entity X losses and profits if X is a

a) Pass-through entity?

   b) C Corporation?

§Assume 35% tax rate for pass through entity.

Answer 1

C corporations are seprately taxable entities which means that profits or losses are not taxed in hand of investor in their tax calculation. entity paid separately all taxed on its income and pass through entities are the entities of which business profit or loss will have to be transferred to individual tax returns of the assessee and will be taxed at individual slabs.

So we can calculate the tax and taxable income if entity x is the c corp for investor x as below.-

Year	Taxable Income of A	Tax Rate	Tax Amount
2014	200000	35%	70000
2015	200000	35%	70000
2016	200000	35%	70000
	Total tax for investor A		210000

Tax and taxable income if entity x is a pass through entity

Year	A's Taxable Income	Profit / (loss) of entity X	Net taxable income of investor A	Tax Rate	Tax Amount
2014	200000	(50000)	150000	35%	52500
2015	200000	(50000)	150000	35%	52500
2016	200000	300000	500000	35%	175000
			Total Tax for investor A		280000

So if entity x is a c corp than total tax for Mr A for three years is $210000 and if entity X is a pass through entity than total tax for Mr A for three years is $280000.

So there is a tax saving of $ 70000 to investor A if the entity is a C Corporation in three years.