Ordinary Income in Partnerships and S Corps. Studying for my CPA and lost!

timer Asked: May 5th, 2015

Question description

A and B are accountants, and share profits 50/50 in the AB partnership. Their attorney has advised them to incorporate for personal liability reasons. Their operations for the year are as follows:

Accounting revenues $ 900,000

Operating expenses $ 215,000

Interest income $  18,000

Charitable contributions $  20,000

Life insurance premiums for X and Y $  12,000     

A and B compensation (1/2 each) $ 300,000

Cash withdrawals (1/2 each)                          $          100,000

The charitable contributions, life insurance premiums and compensation expenses are not included in the operating expenses.  For social security taxes, assume a maximum self employment tax base of $117,000, and a total payroll tax rate of 7.65% (employer or employee), and 12.4% (self-employment tax). Do not consider Medicare tax, or Federal and State income and unemployment taxes.

     A.      Calculate AB’s ordinary net income if taxed as a partnership

   B.        Calculate AB’s  ordinary income if taxed as an S corporation

   C.        Calculate A’s ordinary income if XY is taxed as  an S corporation

   D.        Based on the above analysis, briefly note any planning ideas or additional questions you would ask.

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