Charles is planning to invest $10,000 in a venture whose management is undecided as to whether it should be structured as a regular corporation or as a partnership. Charles will hold a 10% interest in the entity. Determine the treatment to Charles if the entity is a corporation and if it is a partnership. Charles is in the 37% marginal tax bracket. Also, assume that the passive activity rules do not apply to Charles.
a. If the entity incurs an $80,000 operating loss in year 1, what is Charles's cash outflow if the entity is a corporation? A partnership? Do not consider the 3.8% additional tax on net investment income in the analysis.
b. In year 2, the entity earns operating income of $200,000 and makes no distributions to any of the owners. What is the Federal income tax burden on Charles if the investment is a corporation? A partnership?
c. In year 3, the entity earns operating income of $200,000 and distributes all of that year's after-tax proceeds to the owners. What amount of cash is available to Charles if the entity operates as a corporation (assume that any distribution is a qualified dividend)? A partnership?