Question

Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.

I. If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.
II. If Jerrico is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.

Answer 1

An individual who owns and is the sole employee of a corporation must pay federal income tax on salary, payroll taxes (Social Security and Medicare), and federal unemployment tax (FUTA). Losses for an S Corporation can be deducted on personal returns to the extent of stock and debt basis, whereas C Corporations can carry forward losses indefinitely to offset future taxable income subject to limitations.

Step-by-step explanation:

If an individual owns a corporation and is also the sole employee, there are several federal taxes that he would be required to pay. The specific types will largely depend on the structure of the corporation (S Corporation or regular "C" corporation) and the nature of his remuneration.

Federal Taxes for Sole Shareholder-Employee

If the corporation is an S Corporation, the shareholder-employee could take a salary and receive additional distributions. The salary would be subject to federal income tax, Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), and any other taxes that a regular employee would owe.

Regarding the business losses, in an S Corporation, the shareholder can deduct losses from the corporation on his personal tax return to the extent of their stock basis and any debt the corporation owes them, provided that they meet other tax requirements (passive activity loss rules, for example).

For a C Corporation (regular corporation), the corporation itself pays corporate income tax on its profits. If it operates at a loss, the corporation can carry those losses forward to future years to offset taxable income. The Tax Cuts and Jobs Act of 2017 allows such losses to be carried forward indefinitely, with the carryforward limited to 80% of taxable income for losses arising in tax years beginning after December 31, 2017. The sole shareholder-employee's salary would still be subject to the regular individual income and employment taxes.

In summary, the federal taxes include federal income tax on salaries, payroll taxes for Social Security and Medicare, and federal unemployment tax. In addition, the corporation, if a C Corporation, would be subject to federal corporate income tax on its profits or would handle the loss as discussed.