I have a homework about tax planning entities. there is one data of excel and one data of words. the question is in the words data

Davidson Company - Initial Input Variables (2013 Tax Year): Initial Year 1 Business Incomes: Sales Revenues Consulting Fees Business Dividend Income 2013 Individual Federal Tax Rates Assumed Growth Rates: 645,000 30,000 4,000 Business Items: Sales and CGS Consulting Fees Business Dividend Inc Business Expenses Owner Reason. Comp. Other Owner Payments Initial Business Expenses: Cost of Goods Sold Supplies, Rents, Utilities, & Fees Salaries for Each of 5 Employees Health Insurance Cost per Person Charitable Contributions Short-term Capital Losses - Year 1 142,200 54,185 50,000 3,000 13,300 5,000 Ellen's Salary Other Income (Int & Div) Personal Expenses 75,000 50,000 Employees (pct. Salary) Owner (pct. reas. Comp) 130,000 55,014 400,000 20,000 5,043 610,057 (380,000) 230,057 10% 5% Analysis PV Disc. Rate 50,000 70,000 5% 1% 320,000 30 8% Equipment Loan: Principal Term Interest Rate Initial Personal Information: Ellen Davidson's Salary Interest Income Dividend Income Long-term Capital Gains - Year 1 Interest Paid on Home Mortgage State and Local Taxes Paid Charitable Contributions (Cash) Unreimbursed Employee Exp (Ellen) 2013 Social Security limit 2013 forward Social Security limit 10% 10% Buildings and Land Other Business Assets Building Loan: Principal Term (Years) Interest Rate 71,300 1,400 1,200 6,100 8,300 14,000 9,300 4,181 113,700 113,700 Dividends Taxed at a Maximum 15% Rate: 0 = No 1 = Yes Exemption Amount Number of Exemptions Exemption Phase-out Itemized Ded Phase-out 60,000 10 9% 1 3,900 2 300,000 300,000 Davidson Company - Projected Ordinary Business Inputs for Federal Taxes: Sales (net of R&A) Cost of Goods Sold Gross Profit Consulting Fees Dividend Income Gross Income Business Expenses: Capital Loss Interest - Bus Loans Depr - Equipment Depr - Computer Depr - Buildings Sup, Rent, Util, Fees Salaries - Nonowners Salary - Owner/Emp FICA Tax - Nonowners FICA Tax - Owner/Emp Unemp Tax - Nonowners Unemp Tax - Owner Retire Cont - Nonowners Retire Cont - Owner Health Ins - Nonowners Health Ins - Owner Contributions Year 1 645,000 (142,200) 502,800 30,000 4,000 536,800 Year 2 774,000 (170,640) 603,360 34,500 4,080 641,940 Year 3 928,800 (204,768) 724,032 39,675 4,162 767,869 Year 4 1,114,560 (245,722) 868,838 45,626 4,245 918,709 Year 5 1,337,472 (294,866) 1,042,606 52,470 4,330 1,099,406 (5,000) (30,746) (7,862) (1,009) (1,284) (54,185) (250,000) (75,000) (19,125) (5,738) (2,170) (434) (25,000) (7,500) (15,000) (3,000) (13,300) 0 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) (82,500) (20,081) (6,311) (2,170) (434) (26,250) (8,250) (15,750) (3,150) (13,965) 0 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (90,750) (21,085) (6,942) (2,170) (434) (27,563) (9,075) (16,538) (3,308) (14,663) 0 (28,827) (6,871) (581) (10,256) (62,726) (289,406) (99,825) (22,140) (7,637) (2,170) (434) (28,941) (9,983) (17,364) (3,473) (15,396) 0 (28,069) (1,228) (290) (10,256) (65,862) (303,877) (109,808) (23,247) (8,400) (2,170) (434) (30,388) (10,981) (18,233) (3,647) (16,166) Year 2 (13,473) (1,614) (10,256) Year 3 (9,622) (968) (10,256) Year 4 (6,871) (581) (10,256) Year 5 (1,228) (290) (10,256) Total (39,056) (4,462) (42,308) Land Computer Inventory 32,210 6,436 70,000 (20,000) (581) (50,000) 12,210 5,855 20,000 Total 823,064 (444,231) 378,833 Computed MACRS Deduction for Assets: Depr - Equipment Depr - Computer Depr - Buildings Year 1 (7,862) (1,009) (1,284) 0 7,500 13,750 22,250 113,900 113,900 15.00% 25.00% 34.00% 39.00% 34.00% 34.00% Interest/Principal Computations - Building: Asset Ann. Apprec/Depr: Ending Inventory at Year 5: Estimated Cost Estimated Liquidation 0 50,000 75,000 100,000 335,000 9,999,999 5% 5% 5% Pension Plan Contrib: Business Assets - Original Costs: Cash Equipment (5/1 acq) Buildings (11/1 acq) Land (11/1 acq) Computer (5/1/acq) Total Original Contribution Basis Less: Building and Equip Loans Assumed basis in C corp shares 20% 15% 2% 5% 10% 10% Personal Items: Initial Payments to Owner: Reasonable Compensation Other Payments/Withdrawals 0 0 10.00% 17,850 1,785 15.00% 72,500 9,983 25.00% 146,400 28,458 28.00% 223,051 49,920 33.00% 398,351 107,769 35.00% 450,000 105,062 39.60% 999,999 105,063 39.60% 2012 Corporate Federal Tax Rates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mortgage Monthly Payment Month 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 320,000 2,348 Balance Interest Principal 320,000 2,133 215 319,785 2,132 216 319,569 2,130 218 319,352 2,129 219 319,133 2,128 220 318,912 2,126 222 318,690 2,125 223 318,467 2,123 225 318,242 2,122 226 318,015 2,120 228 317,787 2,119 229 317,558 2,117 231 317,327 2,116 233 317,094 2,114 234 316,860 2,112 236 316,625 2,111 237 316,387 2,109 239 316,149 2,108 240 315,908 2,106 242 315,666 2,104 244 315,423 2,103 245 315,177 2,101 247 314,930 2,100 249 314,682 2,098 250 314,432 2,096 252 314,180 2,095 254 313,926 2,093 255 313,671 2,091 257 313,414 2,089 259 313,156 2,088 260 312,895 2,086 262 312,633 2,084 264 312,369 2,082 266 312,104 2,081 267 311,837 2,079 269 311,567 2,077 271 311,296 2,075 273 311,024 2,073 275 310,749 2,072 276 310,473 2,070 278 310,195 2,068 280 309,914 2,066 282 309,633 2,064 284 309,349 2,062 286 309,063 2,060 288 308,775 2,059 290 308,486 2,057 291 308,194 2,055 293 307,901 2,053 295 307,606 2,051 297 307,308 2,049 299 307,009 2,047 301 306,708 2,045 303 306,404 2,043 305 306,099 2,041 307 305,791 2,039 309 305,482 2,037 311 305,171 2,034 314 304,857 2,032 316 304,541 2,030 318 Totals Total Int Total Prin 25,503 2,673 25,282 2,895 25,041 3,135 24,781 3,396 24,499 125,106 3,677 15,776 Computation of Gain/Loss on Disposition of Assets at Liquidation: Interest/Principal Computations - Equipment: Est. Amount Realized Adjusted Basis Taxable Gain/Loss Equipment Buildings 70,213 644,204 (15,958) (357,692) 54,255 286,512 Character of Gain/Loss on Disposition of Assets at Liquidation: | | | | | | Mortgage Monthly Payment Month 60,000 760 Balance Interest Principal 1 60,000 450 310 2 59,690 448 312 Total Int Total Prin Ord. Inc. - Inventory Ord. Inc. - Sec. 1245 Ord. Inc. - Sec. 291 (C) Sec. 1231 Gain/loss Total Gain/Loss Equipment 0 39,056 0 15,199 54,255 Buildings 0 0 8,462 278,050 286,512 Land 0 0 0 12,210 12,210 Computer 0 4,462 0 1,393 5,855 Inventory 20,000 0 0 0 20,000 [Sole Proprietorship] D Davidson Company - Sole Proprietorship Schedule C Income: Sales (net of R&A) Cost of Goods Sold Gross Profit Consulting Fees Dividend Income Gross Income Interest - Bus Loans Depr - Equipment Depr - Computer Depr - Buildings Sup, Rent, Util, Fees Salaries - Nonowners Salary - Owner/Emp FICA Tax - Nonowners FICA Tax - Owner/Emp Unemp Tax - Nonowners Unemp Tax - Owner Retire Cont - Nonowners Retire Cont - Owner Health Ins - Nonowners Health Ins - Owner Contributions Net Inc - Operations Loss on Sale of Stock Net Schedule C Income Self-Employment Tax Year 1 645,000 (142,200) 502,800 30,000 0 532,800 (30,746) (7,862) (1,009) (1,284) (54,185) (250,000) 0 (19,125) 0 (2,170) 0 (25,000) 0 (15,000) 0 0 126,420 0 126,420 Year 2 774,000 (170,640) 603,360 34,500 0 637,860 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) 0 (20,081) 0 (2,170) 0 (26,250) 0 (15,750) 0 0 198,711 0 198,711 Year 3 928,800 (204,768) 724,032 39,675 0 763,707 (29,522) (9,622) (968) (10,256) (59,739) (275,625) 0 (21,085) 0 (2,170) 0 (27,563) 0 (16,538) 0 0 310,619 0 310,619 Year 4 1,114,560 (245,722) 868,838 45,626 0 914,465 (28,827) (6,871) (581) (10,256) (62,726) (289,406) 0 (22,140) 0 (2,170) 0 (28,941) 0 (17,364) 0 0 445,183 0 445,183 Year 5 1,337,472 (294,866) 1,042,606 52,470 0 1,095,076 (28,069) (2,456) (290) (10,256) (65,862) (303,877) 0 (23,247) 0 (2,170) 0 (30,388) 0 (18,233) 0 0 610,229 0 610,229 17,485 19,421 22,418 26,021 30,442 Total 20,000 43,518 8,462 306,853 378,833 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 59,378 59,063 58,746 58,426 58,104 57,780 57,453 57,124 56,793 56,459 56,122 55,783 55,441 55,097 54,750 54,401 54,049 53,694 53,337 52,977 52,614 52,248 51,880 51,509 51,135 50,759 50,380 49,997 49,612 49,224 48,833 48,440 48,043 47,643 47,240 46,835 46,426 46,014 45,599 45,181 44,760 44,335 43,908 43,477 43,043 42,606 42,165 41,722 41,274 40,824 40,370 39,913 39,452 38,988 38,520 38,049 37,574 37,096 Form 1040 - Dave and Ellen Davidson (Sole Proprietorship Entity): Salary - Ellen Salary - Dave (from Corp) Schedule C Inc (Dave) P'ship Share of Ord Inc P'ship Share of Guar Pay Dividend Inc (Bus) Dividend Inc (Pers) Dividend Inc (Davidson Co Interest Inc (Pers) Net LT Capital Gain (Pers) Net ST Capital Loss (Bus) Ord Inc - Inventory (Liq) Ord Inc - Sec. 1245 (Liq) Ord. Inc - Sec. 291 (Liq) Sec. 1231 Gain/Loss (Liq) Gain on C Stock (Liq) Gross Income S/E Tax (1/2) Pct. S/E Health Ins Prem Keogh Retirement Plan Adjusted Gross Income Exemption Deductions Remaining S/E Ins Prem Reduced by AGI Floor Interest on Home Mortg Pers S&L Taxes Char Contribut (Pers) Char Contribut (Bus) Unreimbursed Emp Exp Reduced by AGI Floor Reduction in Itm Ded Taxable Income Gross Inc Tax Liability 445 443 441 438 436 433 431 428 426 423 421 418 416 413 411 408 405 403 400 397 395 392 389 386 384 381 378 375 372 369 366 363 360 357 354 351 348 345 342 339 336 333 329 326 323 320 316 313 310 306 303 299 296 292 289 285 282 278 315 317 319 322 324 327 329 332 334 337 339 342 344 347 349 352 355 357 360 363 365 368 371 374 377 379 382 385 388 391 394 397 400 403 406 409 412 415 418 421 424 428 431 434 437 441 444 447 450 454 457 461 464 468 471 475 478 482 Totals Year 1 71,300 0 126,420 0 0 4,000 1,200 0 1,400 6,100 (5,000) 0 0 0 0 0 205,420 (8,742) (3,000) (7,500) 186,178 (7,800) 0 0 (8,300) (14,000) (9,300) (13,300) (4,181) 3,724 0 133,020 Year 2 74,865 0 198,711 0 0 4,080 1,260 0 1,470 0 0 0 0 0 0 0 280,386 (9,710) (3,150) (8,250) 259,276 (7,800) 0 0 (8,715) (14,700) (9,765) (13,965) (4,390) 4,390 0 204,331 Year 3 78,608 0 310,619 0 0 4,162 1,323 0 1,544 0 0 0 0 0 0 0 396,256 (11,209) (3,308) (9,075) 372,664 (3,266) 0 0 (9,151) (15,435) (10,253) (14,663) (4,610) 4,610 2,180 319,896 Year 4 82,539 0 445,183 0 0 4,245 1,389 0 1,621 0 0 0 0 0 0 0 534,976 (13,011) (3,473) (9,983) 508,510 0 0 0 (9,608) (16,207) (10,766) (15,396) (4,840) 4,840 6,255 456,533 Year 5 86,666 0 610,229 0 0 4,330 1,459 0 1,702 0 0 20,000 43,518 0 315,315 0 1,083,217 (15,221) (3,647) (10,981) 1,053,369 0 0 0 (10,089) (17,017) (11,304) (16,166) (5,082) 5,082 10,915 998,793 24,483 44,243 81,704 108,577 265,090 Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 186,178 (300,000) 0 0 0% 7,800 Year 1 Ordinary Income 15% Cap Gain/Div Inc 15% Sec. 1231 Gains 25% Recapture Gains 126,720 6,300 0 0 5,243 3,878 4,879 4,242 4,481 4,640 4,046 5,075 3,570 22,218 5,551 23,386 Sole Proprietorship Exemption Reduction Computation Year 2 Year 3 Year 4 259,276 (300,000) 0 0 0% 7,800 372,664 (300,000) 72,664 29 58% 3,266 508,510 (300,000) 208,510 83 100% 0 Composition of Taxable Income Year 2 Year 3 Year 4 198,991 5,340 0 0 314,412 5,485 0 0 450,899 5,634 0 0 Year 5 1,053,369 (300,000) 753,369 301 100% 0 Year 5 677,690 5,788 273,007 42,308 Total Taxable Income Year 1 Corp Fed Inc Tax FICA Tax W/H - Owner FICA Tax Paid - Entity Unemp Tax Paid - Entity Self-Employment Tax Individual Fed Inc Tax Total Taxes Paid x Present Value Factor Total PV of Taxes Paid 0 0 0 0 17,485 24,483 41,967 0.9524 39,969 Sole Proprietorship Entity Summary Year 2 Year 3 Year 4 Year 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 19,421 22,418 26,021 30,442 44,243 81,704 108,577 265,090 63,663 104,122 134,599 295,532 0.9070 0.8638 0.8227 0.7835 57,745 89,944 110,735 231,557 Totals 0 0 0 0 115,786 524,096 639,882 NA 529,949 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability Year 1 645,000 (142,200) 502,800 30,000 0 532,800 (30,746) (7,862) (1,009) (1,284) (54,185) (250,000) (75,000) (19,125) 0 (2,170) 0 (25,000) (7,500) (15,000) (3,000) 0 40,920 NA 40,920 Year 2 774,000 (170,640) 603,360 34,500 0 637,860 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) (82,500) (20,081) 0 (2,170) 0 (26,250) (8,250) (15,750) (3,150) 0 104,811 NA 104,811 Year 3 928,800 (204,768) 724,032 39,675 0 763,707 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (90,750) (21,085) 0 (2,170) 0 (27,563) (9,075) (16,538) (3,308) 0 207,487 NA 207,487 Year 4 1,114,560 (245,722) 868,838 45,626 0 914,465 (28,827) (6,871) (581) (10,256) (62,726) (289,406) (99,825) (22,140) 0 (2,170) 0 (28,941) (9,983) (17,364) (3,473) 0 331,903 NA 331,903 23,538 945 0 0 24,483 319,896 456,533 43,183 801 0 0 43,984 80,069 823 0 0 80,891 105,418 845 0 0 106,263 998,793 Year 5 195,227 868 40,951 10,577 247,623 Sole Proprietorship Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 Year 1 Year 5 1,337,472 (294,866) 1,042,606 52,470 0 1,095,076 (28,069) (2,456) (290) (10,256) (65,862) (303,877) (109,808) (23,247) 0 (2,170) 0 (30,388) (10,981) (18,233) (3,647) 0 485,794 NA 485,794 204,331 Tax Liability Computation Year 2 Year 3 Year 4 Year 1 [Partnership] D Davidson Company - Form 1065 Partnership Ordinary Income: Sales (net of R&A) Cost of Goods Sold Gross Profit Consulting Fees Dividend Income Gross Income Interest - Bus Loans Depr - Equipment Depr - Computer Depr - Buildings Sup, Rent, Util, Fees Salaries - Nonowners Salary - Own/Emp (GP) FICA Tax - Nonowners FICA Tax - Owner/Emp Unemp Tax - Nonowners Unemp Tax - Owner Retire Cont - Nonowners Retire Cont - Own (GP) Health Ins - Nonowners Health Ins - Owner (GP) Contributions Net Inc - Operations Loss on Sale of Stock P'ship Ordinary Income 133,020 AGI Base Amt Excess x 3% Limit Net Red 186,178 (300,000) 0 0 9,071 0 259,276 (300,000) 0 0 9,429 0 372,664 (300,000) 72,664 2,180 9,900 2,180 508,510 (300,000) 208,510 6,255 10,395 6,255 1,053,369 (300,000) 753,369 22,601 10,915 10,915 Additional Taxes: 5.0% on Cap Gain/Div. 0.9% on Excess Salary 3.8% on Invest. Income Add to Total Tax 0 0 0 0 0 0 259 259 0 546 267 813 282 1,757 276 2,314 13,940 3,242 285 17,466 Davidson Partnership - Form 1065 Separately Stated Items to Partner Dave Davidson: Dividend Income ST Capital Loss (Bus) Charitable Contributions 4,000 (5,000) (13,300) 4,080 0 (13,965) 4,162 0 (14,663) 4,245 0 (15,396) 4,330 0 (16,166) Davidson Partnership - Form 1065 Guaranteed Payments to Partner Dave Davidson: Salary Health Insurance Cov Pension Plan Contrib Total Guar Payments 75,000 3,000 7,500 85,500 82,500 3,150 8,250 93,900 90,750 3,308 9,075 103,133 99,825 3,473 9,983 113,280 109,808 3,647 10,981 124,435 Computation of Partner Dave Davidson's Self-Employment Tax: Guaranteed Pay Rec'd P'ship Ord Inc Share Subject to S/E Tax Self-Employment Tax 85,500 40,920 126,420 93,900 104,811 198,711 103,133 207,487 310,619 113,280 331,903 445,183 124,435 485,794 610,229 17,485 19,421 22,418 26,021 30,442 Year 4 82,539 0 0 331,903 113,280 4,245 1,389 0 1,621 0 0 0 0 0 0 0 534,976 (13,011) (3,473) (9,983) 508,510 0 0 0 (9,608) (16,207) (10,766) Year 5 86,666 0 0 485,794 124,435 4,330 1,459 0 1,702 0 0 20,000 43,518 NA 315,315 0 1,083,217 (15,221) (3,647) (10,981) 1,053,369 0 0 0 (10,089) (17,017) (11,304) Form 1040 - Dave and Ellen Davidson (Partnership Entity): Salary - Ellen Salary - Dave (from Corp) Schedule C Inc (Dave) P'ship Share of Ord Inc P'ship Share of Guar Pay Dividend Inc (Bus) Dividend Inc (Pers) Dividend Inc (Davidson Co Interest Inc (Pers) Net LT Capital Gain (Pers) Net ST Capital Loss (Bus) Ord Inc - Inventory (Liq) Ord Inc - Sec. 1245 (Liq) Ord. Inc - Sec. 291 (Liq) Sec. 1231 Gain/Loss (Liq) Gain on C Stock (Liq) Gross Income S/E Tax (1/2) Pct. S/E Health Ins Prem Keogh Retirement Plan Adjusted Gross Income Exemption Deductions Remaining S/E Ins Prem Reduced by AGI Floor Interest on Home Mortg Pers S&L Taxes Char Contribut (Pers) Year 1 71,300 0 0 40,920 85,500 4,000 1,200 0 1,400 6,100 (5,000) 0 0 0 0 0 205,420 (8,742) (3,000) (7,500) 186,178 (7,800) 0 0 (8,300) (14,000) (9,300) Year 2 74,865 0 0 104,811 93,900 4,080 1,260 0 1,470 0 0 0 0 0 0 0 280,386 (9,710) (3,150) (8,250) 259,276 (7,800) 0 0 (8,715) (14,700) (9,765) Year 3 78,608 0 0 207,487 103,133 4,162 1,323 0 1,544 0 0 0 0 0 0 0 396,256 (11,209) (3,308) (9,075) 372,664 (3,266) 0 0 (9,151) (15,435) (10,253) Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 186,178 (300,000) 0 0 0% 7,800 Partnership Exemption Reduction Computation Year 2 Year 3 Year 4 259,276 (300,000) 0 0 0% 7,800 372,664 (300,000) 72,664 29 58% 3,266 508,510 (300,000) 208,510 83 100% 0 Composition of Taxable Income Year 5 1,053,369 (300,000) 753,369 301 100% 0 Char Contribut (Bus) Unreimbursed Emp Exp Reduced by AGI Floor Reduction in Itm Ded Taxable Income Gross Inc Tax Liability (13,300) (4,181) 3,724 0 133,020 (13,965) (4,390) 4,390 0 204,331 (14,663) (4,610) 4,610 2,180 319,896 (15,396) (4,840) 4,840 6,255 456,533 (16,166) (5,082) 5,082 11,932 998,793 24,483 44,243 81,704 108,577 265,090 Year 1 Corp Fed Inc Tax FICA Tax W/H - Owner FICA Tax Paid - Entity Unemp Tax Paid - Entity Self-Employment Tax Individual Fed Inc Tax Total Taxes Paid x Present Value Factor Total PV of Taxes Paid 0 0 0 0 17,485 24,483 41,967 0.9524 39,969 Partnership Entity Summary Year 2 Year 3 Year 4 0 0 0 0 0 0 0 0 0 0 0 0 19,421 22,418 26,021 44,243 81,704 108,577 63,663 104,122 134,599 0.9070 0.8638 0.8227 57,745 89,944 110,735 Year 5 0 0 0 0 30,442 265,090 295,532 0.7835 231,557 Year 1 Ordinary Income 15% Cap Gain/Div Inc 15% Sec. 1231 Gains 25% Recapture Gains Total Taxable Income Totals 0 0 0 0 115,786 524,096 639,882 NA 529,949 126,720 6,300 0 0 133,020 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 23,538 945 0 0 24,483 Year 1 Year 2 198,991 5,340 0 0 204,331 Year 3 314,412 5,485 0 0 319,896 Year 4 450,899 5,634 0 0 456,533 Tax Liability Computation Year 2 Year 3 Year 4 43,183 801 0 0 43,984 80,069 823 0 0 80,891 105,418 845 0 0 106,263 Year 5 677,690 5,788 273,007 42,308 998,793 Year 5 195,227 868 40,951 10,577 247,623 Partnership Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 [S Corporation] D Davidson S Corporation - Form 1120 S Corporation Ordinary Income: Sales (net of R&A) Cost of Goods Sold Gross Profit Consulting Fees Dividend Income Gross Income Interest - Bus Loans Depr - Equipment Depr - Computer Depr - Buildings Sup, Rent, Util, Fees Salaries - Nonowners Salary - Own/Emp (GP) FICA Tax - Nonowners FICA Tax - Owner/Emp Unemp Tax - Nonowners Unemp Tax - Owner Retire Cont - Nonowners Retire Cont - Own (GP) Health Ins - Nonowners Health Ins - Owner (GP) Contributions Net Inc - Operations Loss on Sale of Stock S Corp Ordinary Income Year 1 645,000 (142,200) 502,800 30,000 0 532,800 (30,746) (7,862) (1,009) (1,284) (54,185) (250,000) (75,000) (19,125) (5,967) (2,170) (434) (25,000) (7,500) (15,000) (3,000) 0 34,519 0 34,519 Year 2 774,000 (170,640) 603,360 34,500 0 637,860 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) (82,500) (20,081) (6,552) (2,170) (434) (26,250) (8,250) (15,750) (3,150) 0 97,825 0 97,825 Year 3 928,800 (204,768) 724,032 39,675 0 763,707 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (90,750) (21,085) (7,195) (2,170) (434) (27,563) (9,075) (16,538) (3,308) 0 199,857 0 199,857 Year 4 1,114,560 (245,722) 868,838 45,626 0 914,465 (28,827) (6,871) (581) (10,256) (62,726) (289,406) (99,825) (22,140) (7,902) (2,170) (434) (28,941) (9,983) (17,364) (3,473) 0 323,566 0 323,566 AGI Base Amt Excess x 3% Limit Net Red 186,178 (300,000) 0 0 9,816 0 259,276 (300,000) 0 0 10,307 0 372,664 (300,000) 72,664 2,180 10,822 2,180 508,510 (300,000) 208,510 6,255 11,363 6,255 1,053,369 (300,000) 753,369 22,601 11,932 11,932 Additional Taxes: 5.0% on Cap Gain/Div. 0.9% on Excess Salary 3.8% on Invest. Income Add to Total Tax Year 5 1,337,472 (294,866) 1,042,606 52,470 0 1,095,076 (28,069) (2,456) (290) (10,256) (65,862) (303,877) (109,808) (23,247) (8,679) (2,170) (434) (30,388) (10,981) (18,233) (3,647) 0 476,681 0 476,681 0 0 0 0 0 0 259 259 0 546 267 813 282 1,757 276 2,314 13,940 3,242 285 17,466 Davidson S Corporation - Form 1065 Separately Stated Items toS Shareholder Dave Davidson: Dividend Income ST Capital Loss (Bus) Charitable Contributions 4,000 (5,000) (13,300) 4,080 0 (13,965) 4,162 0 (14,663) 4,245 0 (15,396) 4,330 0 (16,166) Davidson S Corporation - Total Compensation Payments to S Shareholder Dave Davidson: Salary Health Insurance Cov Pension Plan Contrib Total Compensation 75,000 3,000 0 78,000 82,500 3,150 0 85,650 90,750 3,308 0 94,058 99,825 3,473 0 103,298 109,808 3,647 0 113,454 Form 1040 - Dave and Ellen Davidson (S Corporation Entity): Salary - Ellen Salary - Dave (from Corp) Schedule C Inc (Dave) S Corp Share of Ord Inc P'ship Share of Guar Pay Dividend Inc (Bus) Dividend Inc (Pers) Dividend Inc (Davidson Co Interest Inc (Pers) Net LT Capital Gain (Pers) Net ST Capital Loss (Bus) Ord Inc - Inventory (Liq) Ord Inc - Sec. 1245 (Liq) Ord. Inc - Sec. 291 (Liq) Sec. 1231 Gain/Loss (Liq) Gain on C Stock (Liq) Gross Income S/E Tax (1/2) Pct. S/E Health Ins Prem Keogh Retirement Plan Adjusted Gross Income Exemption Deductions Remaining S/E Ins Prem Reduced by AGI Floor Interest on Home Mortg Pers S&L Taxes Char Contribut (Pers) Char Contribut (Bus) Unreimbursed Emp Exp Reduced by AGI Floor Reduction in Itm Ded Taxable Income Gross Inc Tax Liability Year 1 71,300 78,000 0 34,519 0 4,000 1,200 0 1,400 6,100 (5,000) 0 0 0 0 0 191,519 0 (3,000) 0 188,519 (7,800) 0 0 (8,300) (14,000) (9,300) (13,300) (4,181) 3,770 0 135,408 Year 2 74,865 85,650 0 97,825 0 4,080 1,260 0 1,470 0 0 0 0 0 0 0 265,150 0 (3,150) 0 262,000 (7,800) 0 0 (8,715) (14,700) (9,765) (13,965) (4,390) 4,390 0 207,055 Year 3 78,608 94,058 0 199,857 0 4,162 1,323 0 1,544 0 0 0 0 0 0 0 379,551 0 (3,308) 0 376,244 (3,042) 0 0 (9,151) (15,435) (10,253) (14,663) (4,610) 4,610 2,287 323,699 Year 4 82,539 103,298 0 323,566 0 4,245 1,389 0 1,621 0 0 0 0 0 0 0 516,658 0 (3,473) 0 513,185 0 0 0 (9,608) (16,207) (10,766) (15,396) (4,840) 4,840 6,396 461,207 Year 5 86,666 113,454 0 476,681 0 4,330 1,459 0 1,702 0 0 20,000 43,518 0 315,315 0 1,063,123 0 (3,647) 0 1,059,477 0 0 0 (10,089) (17,017) (11,304) (16,166) (5,082) 5,082 11,932 1,004,901 25,080 45,006 82,808 110,263 267,328 Year 1 Corp Fed Inc Tax FICA Tax W/H - Owner FICA Tax Paid - Entity 0 5,967 5,967 S Corporation Entity Summary Year 2 Year 3 Year 4 Year 5 0 0 0 0 6,552 7,195 7,902 8,679 6,552 7,195 7,902 8,679 Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 188,519 (300,000) 0 0 0% 7,800 Year 1 Ordinary Income 15% Cap Gain/Div Inc 15% Sec. 1231 Gains 25% Recapture Gains Total Taxable Income Totals 0 36,296 36,296 129,108 6,300 0 0 135,408 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div 24,135 945 S Corporation Exemption Reduction Computation Year 2 Year 3 Year 4 262,000 (300,000) 0 0 0% 7,800 376,244 (300,000) 76,244 30 61% 3,042 513,185 (300,000) 213,185 85 100% 0 Composition of Taxable Income Year 2 Year 3 Year 4 201,715 5,340 0 0 207,055 318,215 5,485 0 0 323,699 455,573 5,634 0 0 461,207 Tax Liability Computation Year 2 Year 3 Year 4 43,946 801 81,323 823 107,269 845 Year 5 1,059,477 (300,000) 759,477 304 100% 0 Year 5 683,797 5,788 273,007 42,308 1,004,901 Year 5 197,646 868 Unemp Tax Paid - Entity Self-Employment Tax Individual Fed Inc Tax Total Taxes Paid x Present Value Factor Total PV of Taxes Paid 434 0 25,080 37,448 0.9524 35,664 434 0 45,006 58,544 0.9070 53,101 434 0 82,808 97,633 0.8638 84,339 434 0 110,263 126,502 0.8227 104,073 434 0 267,328 285,120 0.7835 223,399 2,170 0 530,485 605,247 NA 500,577 Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 0 0 25,080 0 0 44,747 0 0 82,146 0 0 108,114 40,951 10,577 250,042 S Corporation Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 Year 1 [C Corporation] D Davidson C Corporation - Form 1120 Corporation Taxable Income: Year 1 645,000 (142,200) 502,800 30,000 4,000 0 0 0 0 0 536,800 (30,746) (7,862) (1,009) (1,284) (54,185) (250,000) (75,000) (19,125) (5,738) (2,170) (434) (25,000) (7,500) (15,000) (3,000) 38,748 (3,875) (2,800) 0 32,074 Year 2 774,000 (170,640) 603,360 34,500 4,080 0 0 0 0 0 641,940 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) (82,500) (20,081) (6,311) (2,170) (434) (26,250) (8,250) (15,750) (3,150) 102,146 (10,215) (2,856) 0 89,076 Year 3 928,800 (204,768) 724,032 39,675 4,162 0 0 0 0 0 767,869 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (90,750) (21,085) (6,942) (2,170) (434) (27,563) (9,075) (16,538) (3,308) 204,272 (20,427) (2,913) 0 180,932 Year 4 1,114,560 (245,722) 868,838 45,626 4,245 0 0 0 0 0 918,709 (28,827) (6,871) (581) (10,256) (62,726) (289,406) (99,825) (22,140) (7,637) (2,170) (434) (28,941) (9,983) (17,364) (3,473) 328,077 (21,377) (2,971) 0 303,729 Year 5 1,337,472 (294,866) 1,042,606 52,470 4,330 (5,000) 20,000 43,518 8,462 306,853 1,473,239 (28,069) (2,456) (290) (10,256) (65,862) (303,877) (109,808) (23,247) (8,400) (2,170) (434) (30,388) (10,981) (18,233) (3,647) 855,122 (15,396) (3,031) 0 836,695 4,811 18,536 53,813 101,704 284,476 Davidson C Corporation - Carryovers: Contributions (9,425) Capital Loss (5,000) Net Operating Loss 0 (13,176) (5,000) 0 (7,412) (5,000) 0 (1,431) (5,000) 0 0 0 0 Sales (net of R&A) Cost of Goods Sold Gross Profit Consulting Fees Dividend Income Net ST Capital Loss (Corp) Ord Inc - Inventory (Liq) Ord Inc - Sec. 1245 (Liq) Ord Inc - Sec. 291 (Liq) Sec. 1231 Gain/Loss (Liq) Gross Income Interest - Bus Loans Depr - Equipment Depr - Computer Depr - Buildings Sup, Rent, Util, Fees Salaries - Nonowners Salary - Own/Emp (GP) FICA Tax - Nonowners FICA Tax - Owner/Emp Unemp Tax - Nonowners Unemp Tax - Owner Retire Cont - Nonowners Retire Cont - Own (GP) Health Ins - Nonowners Health Ins - Owner (GP) Net Inc Before Contrib Contrib Ded (10% Limit) Dividends Rec Deduction Net Operating Loss Ded Corp Taxable Income Corp Tax Liability Davidson C Corporation - Total Salary Compensation Paid to Owner/SH Dave Davidson: Stated Salary 75,000 82,500 90,750 99,825 109,808 Health Ins. Premiums 0 0 0 0 0 Pension Plan Contrib. 0 0 0 0 0 Total Salary Comp 75,000 82,500 90,750 99,825 109,808 Davidson C Corporation - Total Dividend Payments to S/H Dave Davidson: Other Owner Payments 50,000 55,000 60,500 66,550 73,205 AGI Base Amt Excess x 3% Limit Net Red 188,519 (300,000) 0 0 9,816 0 262,000 (300,000) 0 0 10,307 0 376,244 (300,000) 76,244 2,287 10,822 2,287 513,185 (300,000) 213,185 6,396 11,363 6,396 1,059,477 (300,000) 759,477 22,784 11,932 11,932 Additional Taxes: 5.0% on Cap Gain/Div. 0.9% on Excess Salary 3.8% on Invest. Income Add to Total Tax 0 0 0 0 0 0 259 259 0 395 267 662 282 1,592 276 2,149 13,940 3,061 285 17,286 Form 1040 - Dave and Ellen Davidson (C Corporation Entity): Salary - Ellen Salary - Dave (from Corp) Schedule C Inc (Dave) P'ship Corp Share of Ord In P'ship Share of Guar Pay Dividend Inc (Bus) Dividend Inc (Pers) Dividend Inc (Davidson Co Interest Inc (Pers) Net LT Capital Gain (Pers) Net ST Capital Loss (Bus) Ord Inc - Inventory (Liq) Ord Inc - Sec. 1245 (Liq) Ord. Inc - Sec. 291 (Liq) Sec. 1231 Gain/Loss (Liq) Gain(Loss) on C Stk (Liq) Gross Income S/E Tax (1/2) Pct. S/E Health Ins Prem Keogh Retirement Plan Adjusted Gross Income Exemption Deductions Remaining S/E Ins Prem Reduced by AGI Floor Interest on Home Mortg Pers S&L Taxes Char Contribut (Pers) Char Contribut (Bus) Unreimbursed Emp Exp Reduced by AGI Floor Reduction in Itm Ded Taxable Income Gross Inc Tax Liability Corp Fed Inc Tax FICA Tax W/H - Owner FICA Tax Paid - Entity Unemp Tax Paid - Entity Self-Employment Tax Individual Fed Inc Tax Total Taxes Paid x Present Value Factor Total PV of Taxes Paid Year 1 71,300 75,000 0 0 0 0 1,200 50,000 1,400 6,100 0 0 0 0 0 0 205,000 0 0 0 205,000 (7,800) 0 0 (8,300) (14,000) (9,300) 0 (4,181) 4,100 0 165,519 Year 2 74,865 82,500 0 0 0 0 1,260 55,000 1,470 0 0 0 0 0 0 0 215,095 0 0 0 215,095 (7,800) 0 0 (8,715) (14,700) (9,765) 0 (4,390) 4,302 0 174,027 Year 3 78,608 90,750 0 0 0 0 1,323 60,500 1,544 0 0 0 0 0 0 0 232,725 0 0 0 232,725 (7,800) 0 0 (9,151) (15,435) (10,253) 0 (4,610) 4,610 0 190,086 Year 4 82,539 99,825 0 0 0 0 1,389 66,550 1,621 0 0 0 0 0 0 0 251,923 0 0 0 251,923 (7,800) 0 0 (9,608) (16,207) (10,766) 0 (4,840) 4,840 0 207,543 27,507 29,738 33,197 37,022 Year 1 4,811 5,738 5,738 434 0 27,507 44,227 0.9524 42,121 Year 5 86,666 109,808 0 0 0 0 1,459 73,205 1,702 0 0 0 0 0 0 625,203 898,041 0 0 0 898,041 0 0 0 (10,089) (17,017) (11,304) 0 (5,082) 5,082 8,698 868,330 E Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 205,000 (300,000) 0 0 0% 7,800 Ordinary Income 15% Cap Gain/Div Inc 15% Sec. 1231 Gains 25% Recapture Gains Total Taxable Income Totals 463,341 35,028 35,028 2,170 0 290,898 826,465 NA 676,787 108,219 57,300 0 0 165,519 18,912 8,595 0 0 27,507 Taxable Income Add: MACRS deductions Cash from Prop Sales Tax-exempt Int Capital Loss Rep Dividends Rec'd Ded Less: Prin Paid on Loans Fed Inc Taxes Dividends Paid Disallowed Contrib Gains on Prop Sales Loan Payoff Net Cash to Invest Add: Accumulated Bal Total Undistributed Year 1 32,074 10,154 0 0 0 2,800 (6,551) (4,811) (50,000) (9,425) 0 0 (25,760) 0 (25,760) Year 2 89,076 25,343 0 (1,288) 0 2,856 (7,137) (18,536) (55,000) (3,750) 0 0 31,563 (25,760) 5,804 Year 3 180,932 20,846 0 1,578 0 2,913 (7,775) (53,813) (60,500) 5,764 0 0 89,945 5,804 95,748 Year 4 303,729 17,708 0 4,497 0 2,971 (8,471) (101,704) (66,550) 5,980 0 0 158,161 95,748 253,909 855,260 (230,057) 625,203 Year 2 Year 3 Year 4 Year 5 128,263 61,823 0 0 190,086 Year 5 139,603 67,939 0 0 207,543 21,299 8,439 0 0 29,738 23,923 9,273 0 0 33,197 168,463 699,867 0 0 868,330 Year 5 26,758 10,191 0 0 36,949 34,635 104,980 0 0 139,615 Totals Sole Proprietorship 39,969 57,745 89,944 110,735 231,557 529,949 Partnership 39,969 57,745 89,944 110,735 231,557 529,949 S Corporation 35,664 53,101 84,339 104,073 223,399 500,577 C Corporation 42,121 55,628 87,532 127,053 364,453 676,787 205,000 (300,000) 0 0 7,156 0 215,095 (300,000) 0 0 7,514 0 232,725 (300,000) 0 0 7,890 0 251,923 (300,000) 0 0 8,284 0 898,041 (300,000) 598,041 17,941 8,698 8,698 Additional Taxes: 5.0% on Cap Gain/Div. 0.9% on Excess Salary 3.8% on Invest. Income Add to Total Tax Year 5 836,695 13,003 823,064 7,908 5,000 3,031 (9,228) (284,476) (73,205) (770) (378,833) (340,838) 601,351 253,909 855,260 FINAL ENTITY COMPARISONS TOTAL TAXES PAID (BY YEAR) Year 1 117,767 56,260 0 0 174,027 898,041 (300,000) 598,041 239 100% 0 AGI Base Amt Excess x 3% Limit Net Red Gain (Loss) to Shareholder Upon Liquidating C Corporation Stock: Total Undistributed Cash at Liquidation Date Less Adjusted Basis of Stock Shareholder Gain (Loss) From Liquidation 251,923 (300,000) 0 0 0% 7,800 C Corporation Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 Year 1 Computation of Retained Cash Flows Each Year and Final Liquidation Gain 232,725 (300,000) 0 0 0% 7,800 Tax Liability Computation Year 2 Year 3 Year 4 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 215,095 (300,000) 0 0 0% 7,800 Year 5 Composition of Taxable Income Year 2 Year 3 Year 4 Year 1 163,434 C Corporation Entity Summary Year 2 Year 3 Year 4 Year 5 18,536 53,813 101,704 284,476 6,311 6,942 7,637 8,400 6,311 6,942 7,637 8,400 434 434 434 434 0 0 0 0 29,738 33,197 37,022 163,434 61,330 101,329 154,434 465,144 0.9070 0.8638 0.8227 0.7835 55,628 87,532 127,053 364,453 C Corporation Exemption Reduction Computation Year 2 Year 3 Year 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 73 73 20,916 0 2,902 23,818 TAX PLANNING CASE 6 TAX COMPARISON OF THE FOUR BUSINESS ENTITIES Description The "choice of entity" decision is one of the most important decisions facing practitioners and their clients who own and operate businesses. There are several forms to choose from, each of which generates different legal and tax consequences. There is no single form of entity that is appropriate for every type of business owner or entity that a practitioner is likely to encounter. Choosing the appropriate form of entity in which to operate is a complex decision. It depends upon many non-tax factors, including the owners' needs and desires and the particular characteristics and needs of the business in question. The federal tax consequences of each type of entity also play an important role, especially in closely held entities where the parties' combined tax liabilities should be analyzed as part of the decision-making process. This case study includes is an extension of the facts of Davidson Company discussed in Chapter 12, in that the projected tax results are rolled forward through Year 5, with a liquidation of the entity occurring at the end of Year 5. The spreadsheet necessary to make these computations, Case 6- Entities - 2013, is included with this case. These questions involve manipulations of key input variables for purposes of analyzing the tax consequences associated with each type of entity. Learning Objectives 1. Determine the key tax differences in the treatment of business income for the four major types of taxable entities. 2. Distinguish the role of payroll taxes in each of the four types of entities. 3. Distinguish the treatment of payments to business owners under each of the four types of entities. 4. Determine the differing tax effects of liquidations of the business for each of the four types of entities. 5. Assess the effects of changes in key input variables on the present value of the total tax costs associated with each type of business entity. 6. Assess the relative effects on the results assuming that the 15% preferential rate on qualifying dividends is no longer available for individual taxpayers; in other words, dividend income is taxed at ordinary income rates. TAX PLANNING CASE 6 TAX COMPARISON OF THE FOUR BUSINESS ENTITIES QUESTIONS This assignment utilizes an Excel spreadsheet to extend the analysis of the four entities for four additional years and incorporates the effects of liquidating the entity at the end of Year 5. The spreadsheet allows for alternative inputs of each of the initial year variables used in Case Study #1. Instructions for utilizing this spreadsheet are included on the next page. 1. In the original spreadsheet analysis based on the current inputs, the \"Reasonable Compensation\" variable (cell D20) is $55,000, and the \"Other Payments/ Withdrawals\" variable (cell D21 of the spreadsheet) is $30,000. Redetermine the total taxes paid under each of the following changes in these two variables, and explain the relative changes in results: Total Taxes Paid by Entity Sole Proprietorship Partnership S Corporation C Corporation $75,000/$50,000 Comp/Other Pay $529,949 $529,949 $500,577 $676,787 $100,000/$25,000 Comp/Other Pay $ $ $ $ $50,000/$75,000 Comp/Other Pay $ $ $ $ Explanation____________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ ___ 2. In the original analysis, the \"Sales/CGS Growth Percentage\" variable (cell H7 of the spreadsheet) is 20%. Redetermine the total taxes paid under each of the following changes in this growth percentage, and explain the relative changes in the results: Total Taxes Paid by Entity Sole Proprietorship Partnership S Corporation C Corporation 20% Sales/CGS Growth $529,949 $529,949 $500,577 $676,787 12% Sales/CGS Growth $ $ $ $ 28% Sales/CGS Growth $ $ $ $ Explanation____________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ ___ 3. In the original analysis, the \"Land/Building Appreciation\" variable (cell H27 of the spreadsheet) is 10%. Redetermine the total taxes paid under each of the following changes in appreciation rates, and explain the relative changes in the results: Total Taxes Paid by Entity Sole Proprietorship Partnership S Corporation C Corporation 10% Appreciation Rate $529,949 $529,949 $500,577 $676,787 2% Appreciation Rate $ $ $ $ 18% Appreciation Rate $ $ $ $ Explanation____________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ ___ 4. In the original analysis, the dividends received by the individual taxpayers qualified for a 15% maximum rate. Redetermine the total taxes paid assuming that the preferential dividend rate sunsets as proposed, and dividends are taxed fully as ordinary income (change the input for cell H43 to reflect this). Explain the relative changes in results. Total Taxes Paid by Entity Sole Proprietorship Partnership S Corporation C Corporation Current Preferential Rate $529,949 $529,949 $500,577 $676,787 No Preference $55,000/$30,000 Comp/Other Pay $ $ $ $ No Preference $70,000/$15,000 Comp/Other Pay $ $ $ $ Explanation___________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _____________________ Spreadsheet Instructions The spreadsheet Case 6 - Entities - 2013 is included with this case. The first page of the spreadsheet consists of input information, and the first column of input variables matches the assumed information in Phase I (with the exception of the detailed business assets information; in Case Study #1, the total Year 1 MACRS deduction of $35,748 is given). The second column of inputs reflect the assumed growth rates in business and personal items, the pension plan contribution percentages, the annual appreciation or depreciation rates in values of business assets, the present value discount rate used in each analysis, and information on business loans on the building and the equipment. The second page of the spreadsheet discloses the projected business income and expense amounts for the five years (as adjusted by growth rates), the computed MACRS deductions for each year, and the computation and character of the gains (losses) realized on the sale of all business assets at liquidation in the fifth year. Note that the estimated amounts realized for each asset reflects the assumed appreciation/depreciation input rates. The remaining pages summarize the total taxes paid over the five years for each entity. In each case, it is assumed that the business assets are sold by the entity for cash, and that any cash remaining (including accumulations of cash for the five years) is distributed to the owner in final liquidation of the entity. In order to provide rough approximations of the double taxation possibility of liquidating the C corporate entity, it is necessary to estimate the final assets on hand for the corporation (all converted to cash) immediately prior to liquidation. This estimate is not really needed for the other three entity types since there is no double taxation at liquidation, i.e., gains or losses on sales of business assets are taxed at the individual owner level only and no consequences arise when the net cash is distributed to the owner of the business. On the other hand, all distributions from a C Corporation, a separate legal entity, have tax consequences. Any gains and losses on business asset sales are taxable to the C Corporation, a separate taxable entity. Additionally, after all business assets have been converted to cash, the distributions to shareholders in liquidation of their shares are taxable events. And these distributions include not just the proceeds from asset sales but also any assets accumulated over the life of the business that have not been distributed to shareholders. Thus, to obtain a more realistic picture of the tax consequences of liquidating a corporation, it is necessary to estimate the total accumulated (undistributed) corporate assets on hand at the time of liquidation. This estimate is provided in the spreadsheet by converting each year's taxable income to a cash flow figure by adding back noncash flow items (e.g., depreciation) and subtracting nondeductible cash flow items (e.g., loan principal payments, dividend payments, and federal income taxes paid). These cash flows are then accumulated across all five years. In each case, for simplicity it is assumed that the net cash inflows for each year are invested in a tax-exempt source at the discount rate (which increases the following year's cash inflows). Note particularly the cash flow results in the last year: the cash flow adjustments omit the taxable gains on disposing of business assets and instead substitute the cash realized on such sales. The last year cash flow is also decreased for the hypothetical payoff of loan balances on the building and the equipment. The final cash accumulation at the end of Year 5 is used as an estimate of the total corporate assets (all converted to cash) that are available to distribute to the shareholders (Dave Davidson, the sole shareholder in this case). This number is compared to the shareholder's adjusted basis in the shares (based on original capital contributions), and any resulting gain or loss is capital gain and loss upon final liquidation of the corporation, reportable on the shareholder's individual tax return. The following exercise requires changing three key input variables in the spreadsheet analysis, comparing the projected results with the original spreadsheet results, and analyzing the results for possible reasons for the differences. In each case, the results for the current iteration are given in a table. You are to complete the table with changes in a key input variable, and then explain why the results changed. (In each case, remember to reset the variables to the original amounts before changing a new variable.)