Stanford University Tax Planning Strategies Business Entities Discussion Questions

1. Monica Richards owns 80 percent of Hiko  Corporation; the remaining shares are owned by her children. During the  current year, Hiko’s gross receipts were over $300,000 and it paid a  salary of $90,000 to Monica. If Hiko is a regular C corporation, the IRS  may argue that the salary payment is too large. On the other hand, if  Hiko is an S corporation, the IRS may argue that the salary payment is  too small. Explain this paradox.

2. Marker Solutions is a security  consulting company (considered a specialized service trade or business  for Sec. 199a purposes) that reports the following in 2019:

Gross Consulting Fees Collected

$424,850

Expenses:

Office Rent:

$84,000

Supplies:

$19,121

Salaries to non-owner Employees

(3 @ $60,000 each)

$180,000

Other ordinary business expenses:

26,413

Reasonable compensation to owner (Judy Marker)

$30,000

Additional cash withdrawals by Judy Marker

$12,000

The  employer portion of FICA taxes on wages paid was 7.65%. In addition,  Federal and State Unemployment taxes were assessed and paid by Marker  Solutions at a rate of 6% on the first $7,000 of earnings per employee.  Judy Marker is 100% owner of Marker Solutions. She is married to Jay  Marker, who earns a $40,000 salary (with $4,000 withheld for federal  income tax purposes) as a W2 employee of a local grocery store. Judy and  Jay take the standard deduction when filing their personal taxes. Judy  made estimated federal tax payments totaling $16,000 during 2019.

Assuming that Marker Solutions is operated as a sole proprietorship, compute the following:

1. Self-employment income
2. Self-employment tax liability
3. Judy and Jay Marker’s federal taxable income
4. Judy and Jay Marker’s federal tax payment due (or overpayment to be refunded) with their MFJ 2019 income tax return

3.  Refer to the facts presented in Problem 2. Now assume that Marker  Solutions is operated as a C Corporation. The reasonable compensation to  Judy Marker was paid in the form of W2 wages (of which $3,000 was  withheld for federal income taxes) and therefore would be subject to the  FICA and unemployment taxes at the corporate level. The estimated tax  payments made were paid by and for the business. Compute the following  under these assumptions:

1. Corporate taxable income
2. Corporate tax liability
3. Judy and Jay Marker’s federal tax payment due (or overpayment to be refunded) with their MFJ 2019 income tax return

4.  Refer to the facts presented in Problem 2. Now assume that Marker  Solutions is operated as an S Corporation. The reasonable compensation  to Judy Marker was paid in the form of W2 wages (of which $3,000 was  withheld for federal income taxes) and therefore would be subject to the  FICA and unemployment taxes at the corporate level. The estimated tax  payments made were paid by and for the Markers. Compute the following  under these assumptions:

1. S Corporation ordinary income
2. S Corporation tax liability
3. Judy and Jay Marker’s federal tax payment due (or overpayment to be refunded) with their MFJ 2019 income tax return
4. Calculate  the total tax assessed (including employment taxes, SE tax, corporate  income tax, and individual tax) under Problem 2, Problem 3, and Problem 4  assumptions. What form of entity would you recommend to Judy Marker?

5.  In filing its first tax return, Ella Corporation checked the “cost” box  as to inventory method. At the end of the year, the cost and market  value of inventories were the same. In year 2, the market value of the  inventories dropped. Ella would like to use the “lower of cost of  market” method. Ella argues that checking the “cost” box was a mistake,  and that since they essentially applied the lower of cost or market  method in year 1, they should be permitted to use the lower of cost or  market method without asking for permission from the IRS. Do you agree?  Cite a case and applicable Revenue Ruling to support your answer.

6.  Marianna Diago, president of Handler Manufacturing Company, typically  spends the first hour at work each day touring the factory, speaking to  workers, and listening to complaints. Her remaining 7 hours at work are  devoted to long-range planning and financing for the company. Should  Handler treat a portion of Marianna’s salary as capitalizable Code Sec.  163A costs? Explain your answer. Should a portion of all other costs  related to the president’s office (secretary salary, depreciation,  supplies, etc.) be capitalized as Code Sec. 163A costs?