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Davidson Company - Initial Input Variables (2013 Tax Year): Initial Year 1 Business Incomes: Sales Revenues Consulting Fees Business Dividend Income Assumed Growth Rates: 645,000 30,000 4,000 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 Initial Payments to Owner: Reasonable Compensation Other Payments/Withdrawals 55,000 30,000 130,000 55,014 400,000 20,000 5,043 610,057 (380,000) 230,057 Ending Inventory at Year 5: Estimated Cost Estimated Liquidation 50,000 70,000 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 Sales and CGS Consulting Fees Business Dividend Inc Business Expenses Owner Reason. Comp. Other Owner Payments 71,300 1,400 1,200 6,100 8,300 14,000 9,300 4,181 113,700 113,700 20% 15% 2% 5% 10% 10% Personal Items: Ellen's Salary Other Income (Int & Div) Personal Expenses 5% 5% 5% Pension Plan Contrib: Employees (pct. Salary) Owner (pct. reas. Comp) 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 Business Items: 10% 10% Asset Ann. Apprec/Depr: Buildings and Land Other Business Assets 10% 5% Analysis PV Disc. Rate 5% 1% Building Loan: Principal Term (Years) Interest Rate Equipment Loan: Principal Term Interest Rate Dividends Taxed at a Maximum 15% Rate: 0 = No 1 = Yes Exemption Amount Number of Exemptions Exemption Phase-out Itemized Ded Phase-out 320,000 30 8% 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) (55,000) (19,125) (4,208) (2,170) (434) (25,000) (5,500) (15,000) (3,000) (13,300) 0 (30,160) (13,473) (1,614) (10,256) (56,894) (262,500) (60,500) (20,081) (4,628) (2,170) (434) (26,250) (6,050) (15,750) (3,150) (13,965) 0 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (66,550) (21,085) (5,091) (2,170) (434) (27,563) (6,655) (16,538) (3,308) (14,663) 0 (28,827) (6,871) (581) (10,256) (62,726) (289,406) (73,205) (22,140) (5,600) (2,170) (434) (28,941) (7,321) (17,364) (3,473) (15,396) 0 (28,069) (1,228) (290) (10,256) (65,862) (303,877) (80,526) (23,247) (6,160) (2,170) (434) (30,388) (8,053) (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) Computation of Gain/Loss on Disposition of Assets at Liquidation: 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: Ord. Inc. - Inventory Ord. Inc. - Sec. 1245 Ord. Inc. - Sec. 291 (C) Sec. 1231 Gain/loss Equipment 0 39,056 0 15,199 Buildings 0 0 8,462 278,050 Land 0 0 0 12,210 Computer 0 4,462 0 1,393 Inventory 20,000 0 0 0 Total 20,000 43,518 8,462 306,853 Total Gain/Loss 54,255 286,512 12,210 5,855 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 30,442 378,833 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 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) (5,500) 188,178 (7,800) 0 0 (8,300) (14,000) (9,300) (13,300) (4,181) 3,764 0 135,060 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) (6,050) 261,476 (7,800) 0 0 (8,715) (14,700) (9,765) (13,965) (4,390) 4,390 0 206,531 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) (6,655) 375,084 (3,115) 0 0 (9,151) (15,435) (10,253) (14,663) (4,610) 4,610 2,253 322,467 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) (7,321) 511,172 0 0 0 (9,608) (16,207) (10,766) (15,396) (4,840) 4,840 6,335 459,195 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) (8,053) 1,056,297 0 0 0 (10,089) (17,017) (11,304) (16,166) (5,082) 5,082 10,915 1,001,721 24,993 44,859 82,552 109,631 266,249 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 0 0 0 0 17,485 24,993 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 44,859 82,552 109,631 266,249 Totals 0 0 0 0 115,786 528,284 Total Taxes Paid x Present Value Factor Total PV of Taxes Paid 42,477 0.9524 40,454 64,279 0.9070 58,303 104,970 0.8638 90,677 135,653 0.8227 111,602 296,691 0.7835 232,465 [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 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) (55,000) (19,125) 0 (2,170) 0 (25,000) (5,500) (15,000) (3,000) 0 62,920 NA 62,920 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) (60,500) (20,081) 0 (2,170) 0 (26,250) (6,050) (15,750) (3,150) 0 129,011 NA 129,011 Year 3 928,800 (204,768) 724,032 39,675 0 763,707 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (66,550) (21,085) 0 (2,170) 0 (27,563) (6,655) (16,538) (3,308) 0 234,107 NA 234,107 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) (73,205) (22,140) 0 (2,170) 0 (28,941) (7,321) (17,364) (3,473) 0 361,185 NA 361,185 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) (80,526) (23,247) 0 (2,170) 0 (30,388) (8,053) (18,233) (3,647) 0 518,004 NA 518,004 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 55,000 3,000 5,500 63,500 60,500 3,150 6,050 69,700 66,550 3,308 6,655 76,513 73,205 3,473 7,321 83,998 80,526 3,647 8,053 92,225 83,998 92,225 Computation of Partner Dave Davidson's Self-Employment Tax: Guaranteed Pay Rec'd 63,500 69,700 76,513 644,070 NA 533,502 P'ship Ord Inc Share Subject to S/E Tax Self-Employment Tax 62,920 126,420 129,011 198,711 234,107 310,619 361,185 445,183 518,004 610,229 17,485 19,421 22,418 26,021 30,442 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) Char Contribut (Bus) Unreimbursed Emp Exp Reduced by AGI Floor Reduction in Itm Ded Taxable Income Gross Inc Tax Liability Year 1 71,300 0 0 62,920 63,500 4,000 1,200 0 1,400 6,100 (5,000) 0 0 0 0 0 205,420 (8,742) (3,000) (5,500) 188,178 (7,800) 0 0 (8,300) (14,000) (9,300) (13,300) (4,181) 3,764 0 135,060 Year 2 74,865 0 0 129,011 69,700 4,080 1,260 0 1,470 0 0 0 0 0 0 0 280,386 (9,710) (3,150) (6,050) 261,476 (7,800) 0 0 (8,715) (14,700) (9,765) (13,965) (4,390) 4,390 0 206,531 Year 3 78,608 0 0 234,107 76,513 4,162 1,323 0 1,544 0 0 0 0 0 0 0 396,256 (11,209) (3,308) (6,655) 375,084 (3,115) 0 0 (9,151) (15,435) (10,253) (14,663) (4,610) 4,610 2,253 322,467 Year 4 82,539 0 0 361,185 83,998 4,245 1,389 0 1,621 0 0 0 0 0 0 0 534,976 (13,011) (3,473) (7,321) 511,172 0 0 0 (9,608) (16,207) (10,766) (15,396) (4,840) 4,840 6,335 459,195 Year 5 86,666 0 0 518,004 92,225 4,330 1,459 0 1,702 0 0 20,000 43,518 NA 315,315 0 1,083,217 (15,221) (3,647) (8,053) 1,056,297 0 0 0 (10,089) (17,017) (11,304) (16,166) (5,082) 5,082 11,932 1,001,721 24,993 44,859 82,552 109,631 266,249 Year 1 Corp Fed Inc Tax FICA Tax W/H - Owner FICA Tax Paid - Entity 0 0 0 Partnership Entity Summary Year 2 Year 3 Year 4 0 0 0 0 0 0 0 0 0 Year 5 Totals 0 0 0 0 0 0 Unemp Tax Paid - Entity Self-Employment Tax Individual Fed Inc Tax Total Taxes Paid x Present Value Factor Total PV of Taxes Paid 0 17,485 24,993 42,477 0.9524 40,454 0 19,421 44,859 64,279 0.9070 58,303 0 22,418 82,552 104,970 0.8638 90,677 0 26,021 109,631 135,653 0.8227 111,602 0 30,442 266,249 296,691 0.7835 232,465 0 115,786 528,284 644,070 NA 533,502 [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) (55,000) (19,125) (4,437) (2,170) (434) (25,000) (5,500) (15,000) (3,000) 0 58,049 0 58,049 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) (60,500) (20,081) (4,869) (2,170) (434) (26,250) (6,050) (15,750) (3,150) 0 123,708 0 123,708 Year 3 928,800 (204,768) 724,032 39,675 0 763,707 (29,522) (9,622) (968) (10,256) (59,739) (275,625) (66,550) (21,085) (5,344) (2,170) (434) (27,563) (6,655) (16,538) (3,308) 0 228,329 0 228,329 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) (73,205) (22,140) (5,866) (2,170) (434) (28,941) (7,321) (17,364) (3,473) 0 354,885 0 354,885 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) (80,526) (23,247) (6,439) (2,170) (434) (30,388) (8,053) (18,233) (3,647) 0 511,131 0 511,131 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 55,000 3,000 0 58,000 60,500 3,150 0 63,650 66,550 3,308 0 69,858 73,205 3,473 0 76,678 80,526 3,647 0 84,172 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 58,000 0 58,049 0 4,000 1,200 0 1,400 6,100 (5,000) 0 0 0 0 0 195,049 0 (3,000) 0 192,049 (7,800) 0 0 (8,300) (14,000) (9,300) (13,300) (4,181) 3,841 0 139,009 Year 2 74,865 63,650 0 123,708 0 4,080 1,260 0 1,470 0 0 0 0 0 0 0 269,033 0 (3,150) 0 265,883 (7,800) 0 0 (8,715) (14,700) (9,765) (13,965) (4,390) 4,390 0 210,938 Year 3 78,608 69,858 0 228,329 0 4,162 1,323 0 1,544 0 0 0 0 0 0 0 383,823 0 (3,308) 0 380,515 (2,776) 0 0 (9,151) (15,435) (10,253) (14,663) (4,610) 4,610 2,415 328,237 Year 4 82,539 76,678 0 354,885 0 4,245 1,389 0 1,621 0 0 0 0 0 0 0 521,356 0 (3,473) 0 517,883 0 0 0 (9,608) (16,207) (10,766) (15,396) (4,840) 4,840 6,536 465,906 Year 5 86,666 84,172 0 511,131 0 4,330 1,459 0 1,702 0 0 20,000 43,518 0 315,315 0 1,068,292 0 (3,647) 0 1,064,645 0 0 0 (10,089) (17,017) (11,304) (16,166) (5,082) 5,082 11,932 1,010,069 25,980 46,093 84,344 112,166 269,421 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 4,437 4,437 434 0 25,980 35,288 0.9524 33,607 S Corporation Entity Summary Year 2 Year 3 Year 4 Year 5 0 0 0 0 4,869 5,344 5,866 6,439 4,869 5,344 5,866 6,439 434 434 434 434 0 0 0 0 46,093 84,344 112,166 269,421 56,265 95,467 124,332 282,733 0.9070 0.8638 0.8227 0.7835 51,034 82,468 102,288 221,529 Totals 0 26,955 26,955 2,170 0 538,004 594,085 NA 490,926 [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) (55,000) (19,125) (4,208) (2,170) (434) (25,000) (5,500) (15,000) (3,000) 62,278 (6,228) (2,800) 0 53,251 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) (60,500) (20,081) (4,628) (2,170) (434) (26,250) (6,050) (15,750) (3,150) 128,029 (12,803) (2,856) 0 112,370 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) (66,550) (21,085) (5,091) (2,170) (434) (27,563) (6,655) (16,538) (3,308) 232,743 (22,199) (2,913) 0 207,631 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) (73,205) (22,140) (5,600) (2,170) (434) (28,941) (7,321) (17,364) (3,473) 359,395 (14,663) (2,971) 0 341,761 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) (80,526) (23,247) (6,160) (2,170) (434) (30,388) (8,053) (18,233) (3,647) 889,573 (15,396) (3,031) 0 871,145 8,313 27,074 64,226 116,199 296,189 Davidson C Corporation - Carryovers: Contributions (7,072) Capital Loss (5,000) Net Operating Loss 0 (8,234) (5,000) 0 (698) (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 55,000 60,500 66,550 73,205 80,526 Health Ins. Premiums 0 0 0 0 0 Pension Plan Contrib. 0 0 0 0 0 Total Salary Comp 55,000 60,500 66,550 73,205 80,526 Davidson C Corporation - Total Dividend Payments to S/H Dave Davidson: Other Owner Payments 30,000 33,000 36,300 39,930 43,923 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 55,000 0 0 0 0 1,200 30,000 1,400 6,100 0 0 0 0 0 0 165,000 0 0 0 165,000 (7,800) 0 0 (8,300) (14,000) (9,300) 0 (4,181) 3,300 0 124,719 Year 2 74,865 60,500 0 0 0 0 1,260 33,000 1,470 0 0 0 0 0 0 0 171,095 0 0 0 171,095 (7,800) 0 0 (8,715) (14,700) (9,765) 0 (4,390) 3,422 0 129,147 Year 3 78,608 66,550 0 0 0 0 1,323 36,300 1,544 0 0 0 0 0 0 0 184,325 0 0 0 184,325 (7,800) 0 0 (9,151) (15,435) (10,253) 0 (4,610) 3,686 0 140,763 Year 4 82,539 73,205 0 0 0 0 1,389 39,930 1,621 0 0 0 0 0 0 0 198,683 0 0 0 198,683 (7,800) 0 0 (9,608) (16,207) (10,766) 0 (4,840) 3,974 0 153,436 19,307 20,718 23,286 26,085 Year 1 8,313 4,208 4,208 434 0 19,307 36,469 0.9524 34,732 Year 5 86,666 80,526 0 0 0 0 1,459 43,923 1,702 0 0 0 0 0 0 850,866 1,065,140 0 0 0 1,065,140 0 0 0 (10,089) (17,017) (11,304) 0 (5,082) 5,082 8,698 1,035,428 E 192,150 C Corporation Entity Summary Year 2 Year 3 Year 4 Year 5 27,074 64,226 116,199 296,189 4,628 5,091 5,600 6,160 4,628 5,091 5,600 6,160 434 434 434 434 0 0 0 0 20,718 23,286 26,085 192,150 57,483 98,128 153,918 501,094 0.9070 0.8638 0.8227 0.7835 52,139 84,767 126,628 392,621 Totals 512,001 25,687 25,687 2,170 0 281,546 847,092 NA 690,887 Computation of Retained Cash Flows Each Year and Final Liquidation Gain 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 53,251 10,154 0 0 0 2,800 (6,551) (8,313) (30,000) (7,072) 0 0 14,269 0 14,269 Year 2 112,370 25,343 0 713 0 2,856 (7,137) (27,074) (33,000) (1,162) 0 0 72,909 14,269 87,178 Year 3 207,631 20,846 0 3,645 0 2,913 (7,775) (64,226) (36,300) 7,536 0 0 134,271 87,178 221,448 Year 4 341,761 17,708 0 6,714 0 2,971 (8,471) (116,199) (39,930) (733) 0 0 203,821 221,448 425,270 Year 5 871,145 13,003 823,064 10,191 5,000 3,031 (9,228) (296,189) (43,923) (770) (378,833) (340,838) 655,653 425,270 1,080,923 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 1,080,923 (230,057) 850,866 FINAL ENTITY COMPARISONS TOTAL TAXES PAID (BY YEAR) Year 1 Year 2 Year 3 Year 4 Year 5 Totals Sole Proprietorship 40,454 58,303 90,677 111,602 232,465 533,502 Partnership 40,454 58,303 90,677 111,602 232,465 533,502 S Corporation 33,607 51,034 82,468 102,288 221,529 490,926 C Corporation 34,732 52,139 84,767 126,628 392,621 690,887 2013 Individual Federal Tax Rates 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 0 50,000 75,000 100,000 335,000 9,999,999 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: | | | | | | | | | | | | | | | | 1 | | | | | | | | | | | | 2 | 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 1 320,000 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 Total Int Total Prin 25,503 2,673 25,282 2,895 | | | | | | | | | | | 3 | | | | | | | | | | | | 4 | | | | | | | | | | | | 5 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 12 314,180 313,926 313,671 313,414 313,156 312,895 312,633 312,369 312,104 311,837 311,567 311,296 311,024 310,749 310,473 310,195 309,914 309,633 309,349 309,063 308,775 308,486 308,194 307,901 307,606 307,308 307,009 306,708 306,404 306,099 305,791 305,482 305,171 304,857 304,541 2,095 2,093 2,091 2,089 2,088 2,086 2,084 2,082 2,081 2,079 2,077 2,075 2,073 2,072 2,070 2,068 2,066 2,064 2,062 2,060 2,059 2,057 2,055 2,053 2,051 2,049 2,047 2,045 2,043 2,041 2,039 2,037 2,034 2,032 2,030 Totals 254 255 257 259 260 262 264 266 267 269 271 273 275 276 278 280 282 284 286 288 290 291 293 295 297 299 301 303 305 307 309 311 314 316 318 25,041 3,135 24,781 3,396 24,499 125,106 3,677 15,776 Interest/Principal Computations - Equipment: | | | | | | | | | | | Mortgage Monthly Payment Month 1 2 3 4 5 6 7 60,000 760 Balance Interest Principal 60,000 450 310 59,690 448 312 59,378 445 315 59,063 443 317 58,746 441 319 58,426 438 322 58,104 436 324 Total Int Total Prin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 2 3 4 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 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 38,520 433 431 428 426 423 421 418 416 413 411 408 405 403 400 397 395 392 389 386 384 381 378 375 372 369 366 363 360 357 354 351 348 345 342 339 336 333 329 326 323 320 316 313 310 306 303 299 296 292 289 327 329 332 334 337 339 342 344 347 349 352 355 357 360 363 365 368 371 374 377 379 382 385 388 391 394 397 400 403 406 409 412 415 418 421 424 428 431 434 437 441 444 447 450 454 457 461 464 468 471 5,243 3,878 4,879 4,242 4,481 4,640 4,046 5,075 | | | 5 10 11 12 38,049 37,574 37,096 285 282 278 475 478 482 Totals Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 188,178 (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 128,760 6,300 0 0 135,060 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains 24,048 945 0 0 3,570 22,218 Sole Proprietorship Exemption Reduction Computation Year 2 Year 3 Year 4 261,476 (300,000) 0 0 0% 7,800 375,084 (300,000) 75,084 30 60% 3,115 511,172 (300,000) 211,172 84 100% 0 Composition of Taxable Income Year 2 Year 3 Year 4 201,191 5,340 0 0 206,531 316,983 5,485 0 0 322,467 453,561 5,634 0 0 459,195 Tax Liability Computation Year 2 Year 3 Year 4 43,799 801 0 0 80,917 823 0 0 106,472 845 0 0 5,551 23,386 Year 5 1,056,297 (300,000) 756,297 303 100% 0 Year 5 680,618 5,788 273,007 42,308 1,001,721 Year 5 196,387 868 40,951 10,577 Total Tax Liability 24,993 44,600 81,740 107,317 248,783 Sole Proprietorship Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 Year 1 AGI Base Amt Excess x 3% Limit Net Red 188,178 (300,000) 0 0 9,063 0 261,476 (300,000) 0 0 9,429 0 375,084 (300,000) 75,084 2,253 9,900 2,253 511,172 (300,000) 211,172 6,335 10,395 6,335 1,056,297 (300,000) 756,297 22,689 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 Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 188,178 (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 128,760 6,300 0 0 135,060 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div 24,048 945 Partnership Exemption Reduction Computation Year 2 Year 3 Year 4 261,476 (300,000) 0 0 0% 7,800 375,084 (300,000) 75,084 30 60% 3,115 511,172 (300,000) 211,172 84 100% 0 Composition of Taxable Income Year 2 Year 3 Year 4 201,191 5,340 0 0 206,531 316,983 5,485 0 0 322,467 453,561 5,634 0 0 459,195 Tax Liability Computation Year 2 Year 3 Year 4 43,799 801 80,917 823 106,472 845 Year 5 1,056,297 (300,000) 756,297 303 100% 0 Year 5 680,618 5,788 273,007 42,308 1,001,721 Year 5 196,387 868 Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 0 0 24,993 Year 1 0 0 44,600 0 0 81,740 0 0 107,317 40,951 10,577 248,783 Partnership Reductiion in Total Itemized Deductions Year 2 Year 3 Year 4 Year 5 AGI Base Amt Excess x 3% Limit Net Red 188,178 (300,000) 0 0 9,816 0 261,476 (300,000) 0 0 10,307 0 375,084 (300,000) 75,084 2,253 10,822 2,253 511,172 (300,000) 211,172 6,335 11,363 6,335 1,056,297 (300,000) 756,297 22,689 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 0 546 267 813 282 1,757 276 2,314 13,940 3,242 285 17,466 Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 192,049 (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 132,709 6,300 0 0 139,009 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 25,035 945 0 0 25,980 S Corporation Exemption Reduction Computation Year 2 Year 3 Year 4 265,883 (300,000) 0 0 0% 7,800 380,515 (300,000) 80,515 32 64% 2,776 517,883 (300,000) 217,883 87 100% 0 Composition of Taxable Income Year 2 Year 3 Year 4 205,598 5,340 0 0 210,938 322,752 5,485 0 0 328,237 460,272 5,634 0 0 465,906 Tax Liability Computation Year 2 Year 3 Year 4 45,033 801 0 0 45,834 82,821 823 0 0 83,644 109,130 845 0 0 109,975 S Corporation Reductiion in Total Itemized Deductions Year 5 1,064,645 (300,000) 764,645 306 100% 0 Year 5 688,966 5,788 273,007 42,308 1,010,069 Year 5 199,692 868 40,951 10,577 252,089 Year 1 Year 2 Year 3 Year 4 Year 5 AGI Base Amt Excess x 3% Limit Net Red 192,049 (300,000) 0 0 9,816 0 265,883 (300,000) 0 0 10,307 0 380,515 (300,000) 80,515 2,415 10,822 2,415 517,883 (300,000) 217,883 6,536 11,363 6,536 1,064,645 (300,000) 764,645 22,939 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 0 434 267 701 282 1,634 276 2,191 13,940 3,108 285 17,332 Year 1 AGI Base Amt Excess / 2500 Pct Reduct Net Ded 165,000 (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 87,419 37,300 0 0 124,719 Year 1 Tax on Ordinary Income Tax on 15% Cap/Div Tax on 15% 1231 Gains Tax on 25% Recap Gains Total Tax Liability 13,712 5,595 0 0 19,307 C Corporation Exemption Reduction Computation Year 2 Year 3 Year 4 171,095 (300,000) 0 0 0% 7,800 184,325 (300,000) 0 0 0% 7,800 198,683 (300,000) 0 0 0% 7,800 Composition of Taxable Income Year 2 Year 3 Year 4 94,887 34,260 0 0 129,147 103,140 37,623 0 0 140,763 112,117 41,319 0 0 153,436 Tax Liability Computation Year 2 Year 3 Year 4 15,579 5,139 0 0 20,718 17,642 5,643 0 0 23,286 19,887 6,198 0 0 26,085 C Corporation Reductiion in Total Itemized Deductions Year 5 1,065,140 (300,000) 765,140 306 100% 0 Year 5 139,181 896,247 0 0 1,035,428 Year 5 26,653 134,437 0 0 161,090 Year 1 Year 2 Year 3 Year 4 Year 5 AGI Base Amt Excess x 3% Limit Net Red 165,000 (300,000) 0 0 7,156 0 171,095 (300,000) 0 0 7,514 0 184,325 (300,000) 0 0 7,890 0 198,683 (300,000) 0 0 8,284 0 1,065,140 (300,000) 765,140 22,954 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 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 29,271 0 1,789 31,061 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 15, 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 20% Sales/CGS Growth $529,949 $529,949 $500,577 12% Sales/CGS Growth $ $ $ 28% Sales/CGS Growth $ $ $ C Corporation $676,787 $ $ 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___________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ __________________ 5. Provide a one page summary describing what you learned from Project 4. 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 exercises above require changing 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.)