Question

Grant and Marvin organized a new business as a corporation in which they own equal interests. The new business generated a $65,000 operating loss for the year.

a. Assume the corporation expects to generate $500,000 of income next year, and has a 34 percent marginal tax rate. Calculate the net present value of the future tax savings associated with the current year operating loss, using a 4 percent discount rate. (Do not round intermediate computations.)

NPV of future tax saving $21250

b. Now assume that the corporation makes an election under Subchapter S to be treated as a passthrough entity. If Grant’s marginal tax rate is 35 percent and Marvin’s marginal tax rate is 39.6 percent, calculate the tax savings associated with the current year operating loss.

Current year tax savings

Answer 1

b.

As the corporation made an election under subchapter S, the corporation will not be taxed for the income and the income or loss is passed through to the sharehodlers(partners) and the inocme/(loss) will be taxed in the hands of the individuals. Therefore the tax savings will arise from the individuals income.

Total tax savings for the current year

24245

Working:

Total loss in the curent year	65000
	Grant	Marvin
Loss transferred *	32500	32500
Marginal tax rate	35%	39.60%
Tax savings from the loss	11375	12870
Total tax savings	24245
The two shareholders have equal interest