McGraw-Hills Taxation of Individuals and Business Entities 2019 Edition (10th edition)
Question: Chapter 15 Problem 60CP
planne research 60. Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in use. She has had several friends try out her prototype cookware and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called "Cool Touch Cookware (CTC). Daisy understands that it will take a few years for the business to become prof- itable. She would like to grow her business and perhaps at some point "go public or sell the business to a large retailer Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. Kesha was employed as a business consultant when she decided to leave that job and work with Daisy and Aryan. Kesha's husband carns close to $300,000 a year as an engineer (employee). Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CTC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful. While CTC originally has three investors. Dusy and Kesha have plans to grow the business and seek more owners and capital in the future The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC. Kesha would contribute services (legal and business advisory) for the first two years for a 30 percent interest and Aryan would contrib ute cash for a 40 percent interest. The plan called for Daisy and Kesha to be actively involved in managing the business while Aryan would not be. The three equity mers' contributions are summarized as follows: Daisy Contributed FMV Adjusted Basis Ownership interest S300 304 $12 BOOK Kesha Contributed S 1150 Aryan Contributed Wading bopether. Das and Reste made the following five years and to projections for CTC The antiche will be able and that will tinue ton after the time PTER 15 Entities Overview Cool Touch Cookware 5 Year Income and Loss Projections Year Income (Loss) $200.000 (80.000 $20,000) 60.000 80.000 With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensa tion plan that works for all parties. Down the road, they plan to have two busi ness locations in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other. Finally, they would like to arrange for some performance-based financial incentives for each location To get the business activities started, Daisy and Kesha determined CTE would need to borrow $800,000 to purchase a building to house its manufactur- ing facilities and its administrative offices at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $200,000 from local bank and to borrow $200,000 cash from Aryan CTC would pay Aryana market rate of interest on the loan but there was the fixed date for principal repayment Required: Identify significant tax and tantam issies or concerns that may differanse entity types tid discuss how they are relevant to the choice of city sin for CTC 80. Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in me. She has had several friends try out her prototype cookware and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called "Cool Touch Cookware (CTC). Daisy understands that it will take a few years for the business to become prof- itable. She would like to grow her business and perhaps at some point "go public" or sell the business to a large retailer. Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. Kesha was employed as a business consultant when she decided to leave that job and work with Daisy and Aryan, Kesha's husband cars close to $300.000 a year as an engineer (employee), Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CIC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful While CTC originally has three investors, Daisy and Kesha have plans to grow the business and seek more owners and capital in the future. The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC. Kesha would contribute services (legal and business advisory) for the first two years for a percent interest and Aryan would contrib ute cash for a 40 percent interest. The plan called for Daly and Kesha to be actively involved in managing the business while Aryan would not be. The three equity owners' contributions are summarved as follows: FMV Adjusted as $70,00 Ownerships 108 Daisy Centre Land Ca Kesha Card Sood 0.000 Aryan Contributed 10 Working together. Das and Keshu made the following the year incomes projections for CTC They anticipate the home will be fitable and that it will er the first Cool Touch Cookware 5.Yelcome and Loss Projections Ter Income Low 1 $200.000 2 0.000 20.000 60.000 180.000 With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensa tion plan that works for all parties. Down the road, they plan to have two busi ness locations in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other Finally, they would like to arrange for some performance-based financial incentives for each location. To get the business activities started, Daisy and Kesha determined CTC would need to borrow $800,000 to purchase a building to house its manufactur- ing facilities and its administrative offices (at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $300,000 from a local bank and to borrow $200,000 cash from Aryan CTC would pay Aryana market rate of interest on the loan but there was no fixed date for principal repayment Required: Identify wignificant tax and nontax issues or concerns that may differ across entity types and discuss how they are relevant to the choice of entity decision for CTC planne research 60. Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in use. She has had several friends try out her prototype cookware and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called "Cool Touch Cookware (CTC). Daisy understands that it will take a few years for the business to become prof- itable. She would like to grow her business and perhaps at some point "go public or sell the business to a large retailer Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. Kesha was employed as a business consultant when she decided to leave that job and work with Daisy and Aryan. Kesha's husband carns close to $300,000 a year as an engineer (employee). Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CTC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful. While CTC originally has three investors. Dusy and Kesha have plans to grow the business and seek more owners and capital in the future The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC. Kesha would contribute services (legal and business advisory) for the first two years for a 30 percent interest and Aryan would contrib ute cash for a 40 percent interest. The plan called for Daisy and Kesha to be actively involved in managing the business while Aryan would not be. The three equity mers' contributions are summarized as follows: Daisy Contributed FMV Adjusted Basis Ownership interest S300 304 $12 BOOK Kesha Contributed S 1150 Aryan Contributed Wading bopether. Das and Reste made the following five years and to projections for CTC The antiche will be able and that will tinue ton after the time PTER 15 Entities Overview Cool Touch Cookware 5 Year Income and Loss Projections Year Income (Loss) $200.000 (80.000 $20,000) 60.000 80.000 With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensa tion plan that works for all parties. Down the road, they plan to have two busi ness locations in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other. Finally, they would like to arrange for some performance-based financial incentives for each location To get the business activities started, Daisy and Kesha determined CTE would need to borrow $800,000 to purchase a building to house its manufactur- ing facilities and its administrative offices at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $200,000 from local bank and to borrow $200,000 cash from Aryan CTC would pay Aryana market rate of interest on the loan but there was the fixed date for principal repayment Required: Identify significant tax and tantam issies or concerns that may differanse entity types tid discuss how they are relevant to the choice of city sin for CTC 80. Daisy Taylor has developed a viable new business idea. Her idea is to design and manufacture cookware that remains cool to the touch when in me. She has had several friends try out her prototype cookware and they have consistently given the cookware rave reviews. With this encouragement, Daisy started giving serious thought to starting up a business called "Cool Touch Cookware (CTC). Daisy understands that it will take a few years for the business to become prof- itable. She would like to grow her business and perhaps at some point "go public" or sell the business to a large retailer. Daisy, who is single, decided to quit her full-time job so that she could focus all of her efforts on the new business. Daisy had some savings to support her for a while but she did not have any other source of income. She was able to recruit Kesha and Aryan to join her as initial equity investors in CTC. Kesha has an MBA and a law degree. Kesha was employed as a business consultant when she decided to leave that job and work with Daisy and Aryan, Kesha's husband cars close to $300.000 a year as an engineer (employee), Aryan owns a very profitable used car business. Because buying and selling used cars takes all his time, he is interested in becoming only a passive investor in CIC. He wanted to get in on the ground floor because he really likes the product and believes CTC will be wildly successful While CTC originally has three investors, Daisy and Kesha have plans to grow the business and seek more owners and capital in the future. The three owners agreed that Daisy would contribute land and cash for a 30 percent interest in CTC. Kesha would contribute services (legal and business advisory) for the first two years for a percent interest and Aryan would contrib ute cash for a 40 percent interest. The plan called for Daly and Kesha to be actively involved in managing the business while Aryan would not be. The three equity owners' contributions are summarved as follows: FMV Adjusted as $70,00 Ownerships 108 Daisy Centre Land Ca Kesha Card Sood 0.000 Aryan Contributed 10 Working together. Das and Keshu made the following the year incomes projections for CTC They anticipate the home will be fitable and that it will er the first Cool Touch Cookware 5.Yelcome and Loss Projections Ter Income Low 1 $200.000 2 0.000 20.000 60.000 180.000 With plans for Daisy and Kesha to spend a considerable amount of their time working for and managing CTC, the owners would like to develop a compensa tion plan that works for all parties. Down the road, they plan to have two busi ness locations in different cities). Daisy would take responsibility for the activities of one location and Kesha would take responsibility for the other Finally, they would like to arrange for some performance-based financial incentives for each location. To get the business activities started, Daisy and Kesha determined CTC would need to borrow $800,000 to purchase a building to house its manufactur- ing facilities and its administrative offices (at least for now). Also, in need of additional cash, Daisy and Kesha arranged to have CTC borrow $300,000 from a local bank and to borrow $200,000 cash from Aryan CTC would pay Aryana market rate of interest on the loan but there was no fixed date for principal repayment Required: Identify wignificant tax and nontax issues or concerns that may differ across entity types and discuss how they are relevant to the choice of entity decision for CTC
