Case Study: Tax Requirement

Pages: 16 (4381 words)  ·  Bibliography Sources: 2  ·  Level: College Senior  ·  Topic: Business  ·  Buy This Paper


[. . .] " Basically the partners can deduct expenses related to startup if they are connected to investigation of the market or if they were already operating a similar business. Since there has been some cost associated with the startup investigation, the partners are able to deduct these expenses. They are also allowed to spread these expenses out over a 60-month period from the date of startup.

The third method of deduction is found in the on-going expenses of the business. Theses deductions, according to tax code section 162, have to be "ordinary and necessary expense that was paid or incurred during the taxable year in carrying on a trade or business activity." Thus any expense that was incurred that falls into this definition is acceptable to be deducted.

If all of the deductions that the partners are able to claim basically make it to where one or both do not have to pay any tax, then they are subject to the alternative minimum tax. This is in place because of a fairness doctrine established by the congress. It basically says that even though business expenses put a person under the threshold where they would normally have to pay taxes, they do have to pay at least some minimum amount. There are limits of income that the individual must meet before they would have to pay this amount, but both partners qualify. The advice given would depend on the amount likely to be paid if all deductions were taken the first year or spread out over the 60-month period allowed. The goal is to find the method which would allow the partners to pay the least amount of tax.

Requirement 6

According to section 179 businesses have three options depending on the type of deduction schedule they want, and the amount they have to deduct for the new equipment. The code has a "2011Deduction Limit - $500,000 (up from $250k previously). Good on new and used equipment, including new software. 2011 Limit on equipment purchases - $2 Million Dollars (up from $800k previously). "Bonus" Depreciation - 100% (taken after the $500k deduction limit is reached). Note, bonus depreciation is only for new equipment. This can also be taken by businesses that exceed $2 million in capital equipment purchases."

The government wants small businesses to flourish, especially since the economic outlook has been so unfavorable in recent years. Thus, they have increased the amount that can be deducted from equipment that was purchased for the business. The tax code section 179 allows businesses to acquire new technology and equipment and deduct all or part of that equipment up to $500,000. As a matter of fact, the company can actually purchase more than the $500,000 in equipment and deduct the entire amount depending on the depreciation schedule the equipment is on. The additional equipment can be completely deducted from the businesses taxable property because it was purchased during the year and because it falls within the $500,000 that is allowed.

The loss that the company experienced decreases their amount of taxable income. That means that the amount they will be able to deduct is changed also. But, they have the option of taking the deduction over a number of years which means that they could eventually take the entire deduction.

Requirement 7

CS: The actual question is will the $12 million be worth more to the company over the long-term or will the $18 million. Since this is a discussion of what the tax liability would be, this discussion will not include loss of patent and subsequent amount that may give the company. For tax purposes, every year would be taxed as the income would be regarded as income from the company each of the six years or for the one year. Of course, due to other factors, the tax rate may increase over the time of the contract and make it a wash as far as what is paid, but it would seem that CS should take the six payments based on the fact that it is guaranteed money and they would actually receive more over the life of the contract. Also, in the second scenario, CS loses the patent. However, in the second scenario CS gains a great deal of immediate operating capital which would allow them to move on to other projects which may be even more profitable. Thus, it seems that they could benefit greatly from the second option. This could be a win-win for both firms.

CDS: the second option seems the most attractive because they get the patent and they pay 33% less over the life of the contract. The tax rate is the same to them regardless also. They would also have the patent to the product and the stated ability to make adjustments to the patent and to gain from that. There does not seem to be any advantage to the company in giving CS more money over the life of the contract, and also allowing CS to keep the patent. CDS would probably want to have as much control as possible. That means that they would probably elect the second option also.

There are gains for CS regardless the choice they make, but CDS seems to have a clear choice regarding the payments. However, the gain for CS could also be larger if they accept the second option, because they have an immediate influx of $10 million which will allow them to do more than they had previously hoped. Another plus for CS is that they have a good reputation around the country for producing innovative products. If they stand still with the product they already have, other companies may be able to beat them to a new innovation. With the $10 million immediately they can fund more R&D. The second option seems like, as was said above, a win-win situation for both companies.

Requirement 8

This is basically the same as the partners accepting a third party into their LLC partnership. If Emily accepts the 15% interest in the company, the other partners will now have a 42.5% stake respectively. However, she could go with the 10/45/45 deal and $500,000 on top of that. The best deal for her is to take the 15% interest in the company rather than an immediate payment of $500,000 and a 10% stake. She will be immediately taxed on the $500,000 which is one problem. With the 15% she incurs no immediate tax liability. Of course, she is faced with the same company liability that the other partners are, but since this is basically a startup that would probably be deferred. Also, she will make significantly more money by taking the 15% stake. The $500,000 may look good initially, but it will eventually be just a pittance. The technology is unique enough, and needed enough, that it will sell many units. She would benefit much more from the larger percentage in the long-term.

The downside of the 15% ownership is that she could fail and receive almost nothing for her time investment. This is mitigated by the fact that even if she does fail, she has still earned a competitive salary over the two years and can now receive new offers. The benefits in this case outweigh any problems. She is also not a part owner until the two years are up, so the initial tax issues will not fall to her.

Requirement 9

About an S corporation, the IRS web site says;

" S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income. To qualify for S corporation status, the corporation must meet the following requirements: Be a domestic corporation; Have only allowable shareholders; including individuals, certain trust, and estates and may not include partnerships, corporations or non-resident alien shareholders; Have no more than 100 shareholders; Have one class of stock; Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

As far as Clark and Erik are concerned, they meet all of the requirements because the are a domestic firm, have only two stockholders, and they meet the rest of the criteria as well. This means that they can apply for S corporation status, but the benefits… [END OF PREVIEW]

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APA Format

Tax Requirement.  (2011, November 13).  Retrieved September 16, 2019, from

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"Tax Requirement."  13 November 2011.  Web.  16 September 2019. <>.

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"Tax Requirement."  November 13, 2011.  Accessed September 16, 2019.