Question

Janice is the sole owner of Catbird11 Joel is the sole shareholder of Manatee Corporation, a C corporation. Because Manatee's sales have increased igni cantl over the last several years, Joel has determined that the corporation needs a new distribution warehouse. Joel has asked your advice as to whether (1) Manatee should purchase the warehouse or (2) he should pt1rchase the warehot1se and lease it to Manatee. What relevant tax issues w ill you discuss with Joel?

Answer 1

Answer explained below

Step-by-step explanation:

Joel is the sole shareholder of Manatee Corp. C Corporation has separate legal identity and limited liability for the owner but the double taxation is its demerit as its revenue is taxed at the company level and again as shareholder dividends.

Therefore Joel should purchase the warehouse and lease it to Manatee to take the tax advantage and reduce his overall tax liability. Leasing assets to the corporation is legal also and corporation will pay rent to the owner and owner has to show it as rental income.

By this way the tax liability will be lower for the corporation. Joel will get deduction on the items like acquisition interest, depreciation, repairs and maintenance, insurance and administrative costs etc. This way the owner of the corporation can avoid double taxation of any gain from the asset’s appreciation and sale.

As there are limited liability for the owner in C Corporation so having more asset with owner and less with corporation is good strategic decision of a volatile industry.