Biko owns a snowmobile manufacturing business, and Miles owns a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. Biko and Miles have decided to consolidate their businesses as one operation. In so doing, they expect to increase their sales by 15% and cut their costs by 30%. Biko and Miles own their businesses as sole proprie- tors and provide the following summary of their 2009 taxable incomes:
Cost of goods sold
Business taxable income
Other taxable income
(net of allowable deductions)
2009 taxable income
Biko and Miles don’t know what type of entity they should use for their combined business. They would like to know the tax implications of forming a partnership ver- sus a corporation. Under either form, Biko will own 55% of the business and Miles will own 45%. They each require $60,000 from the business and would like to increase that by $5,000 per year.
Based on the information provided, do a three-year projection of the income of the business and the total taxes for a partnership and for a corporation. In doing the projections, assume that after the initial 30% decrease in total costs, their annual costs will increase in proportion to sales. Also, assume that their nonbusiness taxable income remains unchanged. Use the 2010 tax rate schedules to compute the tax for each year of the analysis.
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