Kirk Is Establishing a Business in 2011 Which Could Have

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The Answer is If the business operates as a C corporation, the $300,000 of projected losses will not benefit Kirk on his individual tax return. Instead, the corporation will carry the losses forward to offset against future profits. Assuming profits of $200,000 in year 4 and thereafter, $200,000 of the net operating loss will be used in year 4 and the remaining $100,000 will be used in year 5. From a cash flow perspective, this will result in tax savings to the corporation in years 4 and 5 of $100,250 ($61,250 + $39,000).

If the business operates as a C corporation, the $300,000 of projected losses will not benefit Kirk on his individual tax return. Instead, the corporation will carry the losses forward to offset against future profits. Assuming profits of $200,000 in year 4 and thereafter, $200,000 of the net operating loss will be used in year 4 and the remaining $100,000 will be used in year 5. From a cash flow perspective, this will result in tax savings to the corporation in years 4 and 5 of $100,250 ($61,250 + $39,000). For year 6 and thereafter, the annual tax liability will be $61,250. If the S election is made, the $100,000 losses for each of the first 3 years can be passed through to Kirk and deducted on his individual tax return. This will result in tax savings to him of $35,000 ($100,000 ´ 35%) in 2011, $35,000 ($100,000 ´ 35%) in 2012, and $35,000 ($100,000 ´ 35%) in 2013. When the time value of money concept is considered, the benefit of the S election is even greater compared with C corporation status. At the end of year 3 (2013), Kirk may want to terminate the S corporation election. If the election is maintained, Kirk's annual tax liability will be increased by $70,000 ($200,000 ´ 35%) in 2014, and $70,000 ($200,000 ´ 35%) each year thereafter for the S corporation earnings. If the election is terminated, the annual tax liability of the C corporation will be $61,250 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($100,000 ´ 39%)]. This assumes that the after tax earnings of the C corporation will be reinvested in the growth of the business rather than distributed to the shareholders as dividends.

For year 6 and thereafter, the annual tax liability will be $61,250.
If the S election is made, the $100,000 losses for each of the first 3 years can be passed through to Kirk and deducted on his individual tax return. This will result in tax savings to him of $35,000 ($100,000 ´ 35%) in 2011, $35,000 ($100,000 ´ 35%) in 2012, and $35,000 ($100,000 ´ 35%) in 2013. When the time value of money concept is considered, the benefit of the S election is even greater compared with C corporation status.
At the end of year 3 (2013), Kirk may want to terminate the S corporation election. If the election is maintained, Kirk's annual tax liability will be increased by $70,000 ($200,000 ´ 35%) in 2014, and $70,000 ($200,000 ´ 35%) each year thereafter for the S corporation earnings. If the election is terminated, the annual tax liability of the C corporation will be $61,250 [($50,000 ´ 15%) + ($25,000 ´ 25%) + ($25,000 ´ 34%) + ($100,000 ´ 39%)]. This assumes that the after tax earnings of the C corporation will be reinvested in the growth of the business rather than distributed to the shareholders as dividends.

Kirk Is Establishing a Business in 2011 Which Could Have

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