1. C Corporation :
Taxable income or loss of a C corporation is determined separately from its shareholders.
C corporations can carry forward net operating losses (NOLs) to offset future taxable income.
C corporations do not pass losses through to shareholders.
2. S Corporation :
S corporations are pass-through entities, meaning the losses and income are passed through to the shareholders.
Shareholders can use their share of the S corporation's losses to offset their other income on their personal tax returns.
let's calculate the tax consequences for Ahmed in each scenario :
C Corporation :
Ahmed's tax basis in his Military Stuff Inc. stock at the beginning of the year is $156,500.
Military Stuff Inc. has a $113,000 tax loss for the year.
Ahmed's share of the loss as a 50-percent shareholder would be 50% *
$113,000 = $56,500.
Since C corporations do not pass losses through to shareholders, Ahmed cannot use the loss to offset his other income.
Tax calculation for C corporation scenario :
Ahmed's ordinary income from other sources is $81,500.
Total taxable income = Ordinary income - Loss from C corporation = $81,500 - $0 = $81,500.
Tax on $81,500 at a 24% marginal tax rate = $81,500 * 0.24 = $19,560.
S Corporation :
Assuming Military Stuff Inc. is an S corporation, Ahmed can use his share of the loss to offset his other income.
Ahmed's share of the S corporation's loss is $56,500.
Ahmed's ordinary income from other sources is $81,500.
Total taxable income = Ordinary income - Loss from S corporation = $81,500 - $56,500 = $25,000.
Tax on $25,000 at a 24% marginal tax rate = $25,000 * 0.24 = $6,000.
To calculate the additional tax Ahmed would pay if Military Stuff Inc. is a C corporation compared to an S corporation :
Additional tax = Tax in C corporation scenario - Tax in S corporation scenario
Additional tax = $19,560 - $6,000 = $13,560.
Therefore, Ahmed would pay an additional $13,560 in tax currently if Military Stuff Inc. is a C corporation compared to the tax he would pay if it were an S corporation.