Clara and Charles decide to form a business. They each plan to contribute $15,000 in exchange for a 50 percent interest. The business will borrow $20,000 to cover the balance of its working capital needs. In their business plan, Clara and Charles show that the business will have a loss of $54,000 in its first year. In the second year, however, the business will have a profit of $60,000 and they will each be able to withdraw $5,000 from the business. Clara is in the 28 percent marginal tax bracket and Charles is in the 25 percent marginal tax bracket.
a. Determine the taxes paid by the business (if any) in the first and second year if they organize the business as (1) a partnership, (2) an S corporation and (3) a C corporation.
b. Determine Clara's and Charles's income tax savings in the first year and their bases in the business at year-end if they organize the business as (1) a partnership, (2) an S corporation, and (3) a C corporation.
c. Determine the income tax Clara and Charles will pay in the second year from business operations and their bases in the business at year-end if they organize the business as (1) a partnership, (2) an S corporation, and (3) a C corporation.