Tax consultant at one of the "Big Four" accounting firms
Suppose you are a tax consultant at one of the "Big Four" accounting firms. In April of 2022, a local business professional named John Client emailed your firm about his interest in forming a new corporation. John cannot decide whether to form as an S or C corporation. S corporations are incorporated under state law and therefore have the same legal protections as C corporations. They are governed by the same corporate tax rules that apply in the organization, liquidation, and reorganization of C corporations. However, unlike a C corporation, an S corporation is a flow-through entity and shares many tax similarities with partnerships. You are assigned to respond to John's inquiry. You're planning to have a web-based meeting with John to review some of the items that create concerns for him.
Instructions
create a 6-7 slide PowerPoint deck. Create your deck as though you plan to use it during a remote video call to address John's concerns, as follows:
Establish the required qualifications to become an S versus a C corporation.
Determine one tax-related advantage and one tax-related disadvantage of C and S corporations.
To fulfill this requirement, you must have a total of four examples: an advantage and disadvantage for both entity types
Determine the limitations on the number and type of shareholders that an S versus a C corporation may have.
Assess the circumstances in which an S election versus C may be involuntarily terminated.
Outline which tax forms are submitted by both S and C corporations.
Develop three recommendations related to corporate formation to provide the best tax options for the company.
Use at least three resources to support your research or recommendations. Choose credible, relevant, and appropriate sources, such as your course text, texts from previous taxation courses, or current IRS publications. If you require help with research, writing, and citation, access the library or review library guides.
This course requires the use of Strayer Writing Standards (SWS). The library is your home for SWS assistance, including citations and formatting. Please refer to the Library site for all support. Check with your professor for any additional instructions.
The specific course learning outcomes associated with this assignment are:
Evaluate characteristics of corporate entities for tax planning purposes.
Develop research-based organizational tax planning strategies for corporations and partnerships.
John Client's Corporation Formation: S vs. C
Slide 1: Introduction & Agenda
- Welcome John & thank him for reaching out.
- Briefly introduce yourself and your role at the firm.
- Present the agenda for the meeting:
- Comparing S & C corporations.
- Addressing John's specific concerns.
- Offering tax-planning recommendations.
Slide 2: Qualifications for S vs. C Corporations
- C Corporations: No restrictions on ownership, number of shareholders, or citizenship.
- S Corporations: Must meet specific IRS requirements:
- 100 or fewer shareholders (all U.S. citizens or permanent residents).
- Only one class of stock.
- Gross receipts under $25 million (annual).
Slide 3: Tax Advantages & Disadvantages (C Corporations)
- Advantage: Double taxation avoids the personal income tax rate when profits are retained in the corporation.
- Disadvantage: Double taxation on distributed dividends (corporate tax + shareholder tax).
Slide 4: Tax Advantages & Disadvantages (S Corporations)
- Advantage: Pass-through taxation – business income flows directly to shareholders' tax returns (avoids double taxation).
- Disadvantage: Shareholders liable for personal income tax on their share of income, even if not distributed.
Slide 5: Shareholder Limitations (S vs. C Corporations)
- C Corporations: No restrictions on ownership or number of shareholders.
- S Corporations: Limited to 100 shareholders, all U.S. citizens or permanent residents. Cannot be owned by partnerships, C corporations, or non-resident aliens.
Slide 6: Involuntary Termination of S Election
- Failure to meet IRS requirements: exceeding 100 shareholders, issuing a second class of stock, exceeding $25 million in gross receipts.
- Passive income exceeding 25% of gross receipts: triggers corporate-level tax on that income.
Slide 7: Required Tax Forms (S vs. C Corporations)
- C Corporations: File Form 1120 (corporate income tax return) and Form 1040 (shareholder tax return).
- S Corporations: File Form 1120S (informational return) and Form 1040 (shareholder tax return).
Slide 8: Recommendations for John's New Corporation
- Consider John's expected income and tax bracket: If John expects high personal income and a high tax bracket, an S corporation might be beneficial due to pass-through taxation.
- Project future growth and shareholder plans: If John anticipates exceeding the S corporation limits in the future, starting as a C corporation might be wiser.
- Seek professional tax advice: Discuss John's specific financial situation and business goals with a tax professional for personalized guidance on S versus C corporation formation.
Resources:
- Internal Revenue Service Publication 583: Starting a Business and Keeping Records
- Internal Revenue Service Publication 603: Examination of Returns, Appeals, and Claims in Collection Due Process and Other Procedural Matters
- American Institute of Certified Public Accountants (AICPA) Tax Section
Note: This presentation is a guide for your meeting with John. Adapt the content and level of detail based on his specific circumstances and questions. Be prepared to answer any further queries he may have.
Remember, this is a complex topic, and John may benefit from additional resources and professional guidance beyond this initial meeting. Encourage him to consult with a tax professional to assess his unique situation and make the best choice for his new corporation.