Richardson Company is in its first year of operations as a hardware and software retailer (with occasional consulting jobs).  Richardson reports the following current year results (without respect to the type of entity):  

 

“Business” Income:

  Sales (net of returns and allowances)                                                         $ 490,000

  Gross Consulting Fees Collected                                                                     30,000

  Dividend Income (5% investment in Novice Software Co.)                               4,000

  Loss on Sale of Novice Stock ($28,000 - $33,000, held 11 months)             (    5,000)

 

“Business” Expenses and Costs:

  Cost of Goods Sold                                                                                   (142,200)

  Salaries of 5 employees other than owner Tony Richardson ($30,000 each)   (150,000)

  Payroll taxes paid on employees [($150,000 x .0765) + ($35,000 x .062)]   ( 13,645)

  Health insurance coverage for employees ($3,000 x 5)                               ( 15,000)

  Retirement plan contributions for employees (10% of salaries)                    ( 15,000)

  MACRS depreciation on various company assets                                         ( 35,748)

  Interest, rent, utilities, insurance, supplies, and miscellaneous expenses         ( 59,337)

  Contributions to public charities                                                                   ( 13,300)

 

Compensation to Owners of “Business”:

  Reasonable salary compensation to Tony Richardson                                     (  65,000)

  Other cash payments to owners                                                                   (  20,000)

  Health insurance coverage for Tony Richardson                                             (   3,000)

  Retirement plan contribution for owner (10% of “reasonable salary”)         (    6,500)                   

 

Tony and Ellen Richardson (both age 53) file a joint federal income tax return in the current tax year.  They do not have any dependents.  In addition to any compensation/income from the business described above, Ellen received a salary of $41,300 from ED Industries.  Tony and Ellen also received $1,400 personal interest on a joint account,  $1,200 personal  dividends from jointly-held Thomson Company stock, and $9,200 from the sale of 100 shares of Thomson stock (originally acquired 5 years ago for $3,100).

 

Tony and Ellen’s personal expenses for the yearinclude $2,600 personal property taxes, $12,400 state income taxes, 10,300 charitable contributions (not including the amounts mentioned above), $8,800 interest on personal home mortgage, and $2,600 of unreimbursed employee expenses by Ellen.

 

Required:  

1) For each of the following entity assumptions, determine the total taxes paid for the tax year by completing the schedule shown below. Also, please show all of your calculations.

 

• Assuming that Richardson Company is operated as a sole proprietorship, determine the Richardson’s final federal income tax liability (including any self-employment tax) (Note – the assumption that the pension contribution on Tony’s behalf is 10% of the $65,000 “reasonable salary” is somewhat unrealistic (normally, the amount would be based on the sole proprietorship income), but this assumption is made to make the four entity results roughly comparable).

 

• Assuming that Richardson Company is operated as a partnership (assuming that Tony Richardson is essentially a 100% partner, with a minimal interest held by Ellen), determine the Richardson’s final federal income tax liability (including any self-employment tax).  For these purposes, allocate 100% of all partnership items to Tony Richardson.  (The same pension contribution assumption mentioned in “a” also applies here.)

 

• Assuming that Richardson Company is operated as an S corporation (with Tony Richardson [DD] as essentially a 100% shareholder), determine the Richardson’s final federal income tax liability and any FICA taxes paid on Tony’s compensation by Tony and by Richardson Company  Once again, allocate 100% of all S corporation items to Tony Richardson.

 

• Assuming that Richardson Company is operated as a C corporation (with Tony Richardson (DD) as a 100% shareholder), determine the final corporate income tax liability of Richardson Co., the Richardson’s final federal income tax liability any FICA taxes paid on Tony’s compensation by Tony and by Richardson Company  

 

 

Answer Summary

 

Tax year being compared: _________	S. Propr	P’ship	S Corp	C Corp
Corporate  Income Taxes Paid	NA	NA	NA
FICA Tax on TR – Paid by TR	NA	NA
FICA Tax on TR – Paid by Company	NA	NA
Unemp. Tax on TR - Paid by Company	NA	NA
Self-Employment Tax Paid by TR			NA	NA
Fed Inc Tax Paid by Richardsons
Total Taxes

 

2.  Prepare a tax memo and draft client letter indicating your recommendation to the Richardsons as to the preferred entity. Provide the appropriate tax citations and explain why you believe this method will be the best method. Your tax partner wants the material to be provided in an easy to read format for these clients.