Clara and Charles decide to form a business. Clara plans to contribute $9,000 for a 30 percent interest and Charles plans to contribute $21,000 for a 70 percent interest. The business will borrow $20,000 to cover the balance of its working capital needs. In their business plan, Clara and Charles show that the business will have a loss of $54,000 in its first year. In the second year, however, the business will have a profit of $90,000 and the business will distribute $3,000 to Clara and $7,000 to Charles. Clara is in the 24 percent marginal tax bracket and Charles is in the 22 percent marginal tax bracket; both are in the 15 percent tax bracket for dividend income. In year 2, assume Clara and Charles qualify for the 20 percent qualified business income (QBI) deduction. 

a. Determine the taxes paid by the business (if any) in the first and second year if they organize the business as (1) a partnership, (2) an S corporation and (3) a C corporation.

b. Determine Clara’s and Charles’s income tax savings in the first year and their bases in the business at year-end if they organize the business as (1) a partnership, (2) an S corporation, and (3) a C corporation.

c. Determine the income tax Clara and Charles will pay in the second year from business operations and their bases in the business at year-end if they organize the business as (1) a partnership, (2) an S corporation, and (3) a C corporation.