Assume that all information pertains to tax year 2023 unless otherwise indicated.

1. Depreciation expense includes the depreciation calculated on all assets purchased prior to 2023. In 2023, Maskeraide purchased the following assets for which depreciation expense has not been calculated:
   • Cloth cutting machine purchased on 6/12/23 for $59,000
   • Office furniture purchased on 9/15/23 for $8,000
   • Delivery van purchased on 10/14/23 for $87,000
2. Travel, Meals and Entertainment consist of the following:
   • Business related travel $12,000
   • Business related meals at a restaurant $10,000
   • Tickets to athletic events used to entertain potential customers $5,000
3. Bad debt expense was calculated on the allowance method based on an estimate of uncollectible accounts. A review of all customer accounts deemed two accounts to be completely uncollectible:
   • Perrys Corner Store with a balance due to Maskeraide of $19,000
   • Bilals Boutique with a balance due to Maskeraide of $11,000
4. Employee Benefits expense includes payments of $12,000 that Maskeraide has paid for clothing for both Sasha and Belinda. The owners feel they need to look their best to be good representatives of the company. Though these clothes could be worn outside of work, the owners choose not to wear these clothes anywhere else and consider them their work uniform. Also included in Employee Benefits expense is $2,000 for personal protective equipment (masks, face shields, gloves, hand sanitizer etc) for all employees who work on site.
5. On 9/30/23, Maskeraide paid $42,000 for a contract to rent a storage facility. The amount paid was the full rent for the entire 6 months of the contract. The lease began on October 1, 2023 and extends through March 31, 2024. Included in the book basis P&L Rent expense is the rent for 3 months (October through December 2023).
6. On 10/1/23, Maskeraide received $80,000 from a customer as prepayment for an order that will be shipped as the masks are produced. Management is fairly certain that half of the masks will be shipped by the end of the fiscal year and the remainder will ship early in 2024. None of this prepayment was included in revenue on the attached P&L.
7. Refunds are actual amounts paid to customers during the year.
8. Maskeraide would like to elect out (not claim) bonus depreciation or Section 179 expense.
9. Maskeraide has distributed $60,000 of cash to Sasha and $40,000 of cash to Belinda during the year. If taxed as a partnership, Sasha and Belinda both have sufficient basis in their partnership interest to make distributions not taxable. If taxed as a corporation, the corporation has sufficient E&P to make all distributions qualified dividends.
10. Sasha is married, filing a joint return. He has no children and will use the standard deduction. His wife is a surgeon with a salary of $550,000. They have no other income.
11. Belinda is single with no children. She lives with her partner but they are not married. Belinda works as a camp counselor during the summer and receives a salary of $25,000. This is her only other source of income. Belinda will also use the standard deduction. She cannot claim her partner as a dependent.
12. Maskeraide has not paid any salaries to Belinda or Sasha.

Required:

Sasha and Belinda have come to your firm for help and advice. They would like you to consult with them regarding three questions:

1. What is Maskeraides taxable income for the tax year ending December 31, 2023 based on their projections of book income and the information they provided above? Please provide a complete book-tax reconciliation workpaper showing each book-tax difference. Add additional lines as needed.
2. If Maskeraide were to choose to be taxed as a C corporation, what would be the tax impact on Maskeraide, Sasha, and Belinda? How would that differ if they choose, instead, to be taxed as a partnership? Discuss the differences between taxation of a partnership and taxation of a C corporation and provide calculations of the tax liability for Maskeraide, Sasha, and Belinda under each scenario ignoring any tax credits and prepayments and any additional taxes such as self-employment tax, net investment income tax, and alternative minimum tax..
3. What is your recommendation? Should they elect to be taxed as a partnership? Or as a C corporation? What impact could this decision have in the future?

\begin{tabular}{|c|c|} \hline Maskeraide LLC & \\ \hline Projected Book Basis Profit and Loss - & ccrual Basis \\ \hline December 31, 2023 & \\ \hline Income Statement & \\ \hline Income & \\ \hline Sales - goods/services & 15,000,000 \\ \hline Refunds & (978,000) \\ \hline Cost of goods sold & (12,000,000) \\ \hline Gross Profit & 2,022,000 \\ \hline Operating Expenses & \\ \hline Bad debt expense & 65,000 \\ \hline Salaries & 1,250,000 \\ \hline Rent & 21,000 \\ \hline Travel, meals \& entertainment & 27,000 \\ \hline Depreciation expense & 140,000 \\ \hline Employee benefits & 160,000 \\ \hline Operating Expenses & 1,663,000 \\ \hline Other Income/(Loss) & \\ \hline Federal income taxes & (85,000) \\ \hline State income taxes & (30,000) \\ \hline Interest income - CD & 20,000 \\ \hline Interest income - Cook County Bonds & 50,000 \\ \hline Penalties for late payment on account & (15,000) \\ \hline Other Income/(Loss) & (60,000) \\ \hline Net Income, per books & 299,000 \\ \hline & \\ \hline & \\ \hline & \\ \hline & \\ \hline \end{tabular}