You are in your first year as an associate at Awesome Accountants and are asked to consult
Question:
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 don’t 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.
1. The “Travel, Meals, and Entertainment” expense account includes expenses for Dominic to travel to the Germany to visit a potential customer. The entire trip was 12 days.
Dominic spent 9 days visiting the customer, which included a day treating some of their top executives to a Bayern Munich futbol game. The remaining 3 days, Dominic spent
sight-seeing. The costs related to this trip are as follows:
| flight ticket | $2300 |
| Meals for the entire trip | $2400 |
| Football ticket | $3500 |
| Hotel | $3600 |
All other expenses in this account are 100% deductible business expenses for travel only (no other meals or entertainment).
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 Maskeraide’s 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 corporation? What impact could this decision have in the future?
