You are in your first year as an associate at Awesome Accountants and are asked to consult on a project for Maskeraide LLC. Maskeraide is an LLC owned 75% by Dominic and 25% by Belinda.

The company, which was formed as an LLC on April 1st 2020, makes custom cloth face coverings. They have selected a calendar year end (December 31st) for tax purposes and will file their tax return on the accrual basis of accounting. In the accompanying Excel file, you will find projected (book basis) financial statements for the year ending December 31, 2021.

They know that the second half of November and December will be busy months in terms of sales but they dont expect anything unusual in terms of other activities so they are pretty comfortable that these projections will be reflective of their 2021 profits when the year is closed out.

As an LLC, Maskeraide has the option to choose to be taxed as a C corporation or as a partnership. They are asking for our help to determine which would be the best option. Keep in mind that what is best for one owner may not be what is best for the other owner. You must weigh all factors in providing a recommendation. There may not be a clear-cut right answer and you should be prepared to explain your position for your recommendation to both Dominic and Belinda.

When conflicts arise, it is our job, as tax consultants, to lay out all of the options, explaining costs and benefits of each option, and let the taxpayer make the choice. Ultimately, they may ask you to recommend which option you would choose if you were in their position. You should be prepared to make such a recommendation. Information Provided by Maskeraide and owners Dominic and Belinda

Assume that all information pertains to tax year 2021 unless otherwise indicated.

5. On 9/30/21, Maskeraide paid $18,000 for a contract to rent a storage facility. The amount paid was the full rent for the entire 6 months of the contract. The lease began on October 1, 2021 and extends through March 31, 2022. Included in the book basis P&L Rent expense is the rent for 3 months (October through December 2021).

6. On November 1, 2021, Maskeraide received a prepayment of $50,000 for a shipment of masks. The masks will be shipped in mid-January 2022. Based on the terms of the contract, GAAP rules required the $50,000 of income be reported in 2021 and thus this amount is included in sales for 2021.

7. At the end of 2021, Maskeraide projects they will have requests for refunds of $20,000 which will not be paid until early in 2022. The expense for these refunds has been included in Refunds expense for GAAP purposes.

8. Through inquiry you discover that $300,000 of salaries for the office staff (currently included in Salaries expense) relates to the inventory production and storage processes for the year.

1. Required:

   Dominic and Belinda have come to your firm for help and advice. They would like you to consult with them regarding three questions:

   a) What is Maskeraides taxable income for the tax year ending December 31, 2021 based on their projections of book income and the information they provided above? Please provide a complete book-tax reconciliation workpaper showing each book-tax difference. Add additional lines as needed. When you are done, your tax P&L should show each line item as you would report it on the tax return.

   b) If Maskeraide were to choose to be taxed as a C corporation, what would be the tax impact on Maskeraide, Dominic, and Belinda? How would that differ if they choose, instead, to be taxed as a partnership (ignore any self-employment tax, net investment income tax, or alternative minimum tax implications)? Provide calculations of tax liability for Maskeraide, Dominic, and Belinda under each scenario ignoring any tax credits and prepayments.

   c) What is your recommendation? Should they elect to be taxed as a partnership? Or as a C corporation? What impact could this decision have in the future?