Ronald Is Exploring Whether to Open a Franchise of Quick

question 39

Essay

Ronald is exploring whether to open a franchise of Quick Tax. He plans on forming an S corporation and investing $15,000 of his own money while borrowing $45,000 from the bank to finance the purchase of the necessary computing equipment and software. The bank has proposed two financing options. Under the first option, the interest rate is only 10%, but the loan is recourse. The second option increases the interest rate to 15%, but the loan is nonrecourse.
a.Discuss the tax and non-tax aspects of the two options.
b.If Ronald incurs a $20,000 loss in the first year of operations, how much, if any, of the loss can he deduct if the loan is recourse? Nonrecourse?

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Definitions:

Net Operating Income

The total profit of a business after operating expenses are subtracted from gross profit.

Estimated

Pertaining to figures or values that are approximations or predictions based on available data or trends.

Raw Material

The basic material from which a product is made, essential for the manufacturing process.

Direct Labor Costs

The total expenditure on labor directly involved in the manufacturing process of goods or services.