Boots, Inc. is a C corporation engaged in the shoe manufacturing business. Boots is a calendar year,
Question:
Boots, Inc. is a “C” corporation engaged in the shoe manufacturing business. Boots is a calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. In answering the questions below, assume for convenience that Emil and Betty each are taxable at a combined federal and state flat rate of 40% on ordinary income and a combined flat rate of 20% on qualified dividends and long-term capital gains. During the current year, Boots has the following income and expense items:
Gross Profit, Sale of Inventory : 2,600,000
Capital Gains: 200,000
Operating Expenses: 800,000
Equipment purchased expenses 100% under 168(k): 800,000
Capital losses: 220,000
(a) Determine Boots, Inc.'s taxable income and its tax liability for the current year
(b) What result in (a), above, if instead of paying dividends Boots pays Emil and Betty salaries of $500,000 each? Has the effectiveness of this traditional strategy to reduce the impact of the double tax on corporate earnings changed as a result of the 2017 Act?
(c) Consider generally whether there is any advantage to operating Boots as a pass-through entity, such as a partnership, limited liability company, or S corporation and, if so, whether Emil and Betty will qualify for the new 20% deduction for qualified business income. What additional facts are necessary to evaluate this option?
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones