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Crawford Corporation, a C Corp, is a manufacturer of wire hangers for the laundry and dry - cleaning industry. This second - generation family -
Crawford Corporation, a C Corp, is a manufacturer of wire hangers for the laundry and drycleaning industry. This secondgeneration familyowned business has prospered for many years. It was founded by the family matriarch Joan now deceased fifty years ago. The company was left equally to two of her children, Christopher and Christina. Christopher, age runs the business. Although Christina, age wants nothing to do with wire hangers, she is not happy that she has historically been receiving small dividends from the company.
Little technological change has occurred in the manufacturing of hangers over the years. The advent of thin velvetplastic hangers and improved fabrics has kept the overall market size constant and no major plant expansions or additions are planned. At this point, the business almost "runs itself". By merely doing the same things year to year, the business produces consistent profits before Christopher's salary and corporate taxes in the $ range.
The company has had little tax planning or advice over the years. Christopher is concerned about the taxes the company has been paying. Christine has been complaining about the nominal dividends the company has been paying. When discussing the situation with his friends, they mentioned that they had SCorps".
Christopher thinks that this may be a good idea for the company. You have been retained to review the situation.
A review of tax returns for the past three years indicates the following:
PROJ ECTED
FYE FYE FYE
SALES $ $ $
COST OF GOOD SOLD
GROSS PROFIT
SELLING EXPENSES
GENERAL & ADMIN
INVESTMENT INCOME
INCOME BEFORE OFFICERS
SALARIES AND TAXES
CHRISTOPHER'S SALARY
The PROJECTED Balance Sheet of Crawford Corporation at reflects the following:
Comments
Assets:
Cash $
Loan to Christopher Bears int. at prevailing rates
InvestmentsAt cost Market value
Accounts Receivable
Inventories LIFOFIFO value $
LandBuilding for Plant and offices:
Cost Market value $
Accum Depr
Book Value
MachineryEquipment:
Cost Market value $
Accum Depr
Book Value Most equipment is about years old. Depreciation will be nominal in several years. No major expenditures are anticipated.
Other assets
Total Assets $
Liabilities:
Accounts payable
Accrued expenses
Due on equipment loans Payable over years
Due on mortgage Payable over years
Bank loan Line of credit loan varies throughout year used to meet fluctuating cash needs of the business typically varies from $ to $
throughout year
Total liabilities $
Shareholders' Equity
Common Stock
Retained Earnings Anticipated dividends to be paid FYE $
Total Equity $
Your preliminary discussions with Christopher reveal that he is content to continue running the business as is He has no desire to expand into other business areas.
He wants neither the risk nor the responsibility Since the hanger market is relatively stable, he perceives that future profits should be similar. His present situation gives him sufficient income to maintain his lifestyle. Further, since the business "runs itself", he has the flexibility to take long weekends, extended vacations etc.
REQUIRED:
Prepare a memorandum discussing the tax issues raised by the above scenario. Your discussion should consider any advantagesdisadvantages of continuing as a C Corp vs electing to be taxed as an S Corp. WHAT RECOMMENDATION would you make in this situation? Should they remain a C Corp or elect to be taxed as an S Corp for the tax year that will begin
CAVEAT: Focus on the tax issues; do not get bogged down in a discussion of the basic mechanics of a C Corp andor an S Corp and how they are taxed.
FOR PURPOSES OF THIS ASSIGNMENT, YOU SHOULD ASSUME THE FOLLOWING:
Although the C Corp tax rate has been reduced to you should assume that the combined tax rate on C Corp income and any C Corp dividends is comparable to the tax rate on S Corp income.
Appropiate calculations must be provided.
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