In 2018, Sally, a single woman who operates her business as a sole proprietor, is switching over to a C-Corporation on January 1, 2019. She estimates her 2019 sales will be $500,000 and COGS will be $150,000. If she does switch over, she estimates her other three expenses will be slightly different. The first expense, her business liability insurance, will decrease from $25,000 to $5,000 due to needing less liability protection in corporate form. The second expense, your tax preparation fee, will increase from $10,000 to $20,000 since two tax returns will now be due (Form 1040 + form 1120). Assume all tax preparation fees you charge Sally are 100% tax deductible. The third expense, employee wages, is estimated to be $50,000 for her one employee, Sam. However, since Sally will be working for the corporation, she'll be required to pay herself a wage, which is typical wage of a CEO of a business her size of $100,000, thus as a C-corporation you'll have $150,000 in wage expense. For simplicity's sake, assume all income, other than dividend income, reported on Form 1040 is taxed at a flat rate of 37%. Further assume she always elects to take the standard deduction. Sally asks you, as her tax accountant, to estimate the differences in her after-tax income if she remains a sole proprietor versus becomes a C-corporation. If she becomes a C-corporation, she'll pay herself a normal wage and all remaining income left in the C-Corporation will be paid out as a dividend to Sally. Ignore all payroll taxes (of both Sam and Sally) and assume dividend income is qualified dividend income and will all be taxed as long-term capital gain rates. Further assume that Sally is neither a low-income nor a high-income taxpayer (i.e., all her dividend income will all be taxed at the same rate).

On January 1, 2019 Sally plans to transfer her office building for stock in a C-corporation. The office building has a FMV of $1,000,000, and adjusted basis of $250,000, and a lien on the building of $230,000. The C-corporation would assume the loan. There are two options she is contemplating: Option 1 is to form a new C-corporation, called Lawgineering, in which she would transfer her office building to the C-corporation in exchange for receiving 100% of its stock. Option 2 is to join an existing C-corporation, called Enginlawing, which is owned by Trevor who currently owns 100% of its stock. In this transaction, Sally would transfer her office building to the existing C-corporation in exchange for receiving 87% of its outstanding stock plus a Nancy Pelosi Impeachment Pen. Enginlawing originally acquired the pen for $20,000 and it has a FMV of $100,000 on the date of the transfer.

Requirement - Calculate a cost summary comparison between Options 1 and 2. Show what Sally's realized gain, recognized gain, stock tax basis, and pen basis (if applicable) will be in both scenarios. Will the corporation will have any realized gain or recognized gain? If so, what is the corporation's basis in the building will be in both scenarios? The first set of columns should show if Option 1 and the second set of columns should show Option 2. After calculations, which option (1 or 2) makes the most financial sense and why