Corporate Taxation

MBA 7295
Business Structure
Assessment Presentation

Michael
Hutchinson

C-Corporation
Happy Feet
By:
Holly Hartman & Angela
Whitaker
2

Reasons for selecting a C-Corp

with Happy Feet
Happy Feet C Corp was decided to be a closely
held; separately taxable entity from Holly and
Angelas taxable income. Taxes are paid at the
corporate level. Assets such as Holly & Angelas
homes are protected.
Happy Feet needed the legal ability to raise
capital via the sale of stock in the beginning.
Shareholders can easily transfer the ownership by
selling their stock. Individual owners liability is
limited to the value of stock they are holding in
the corporation.
Tax on corporate income is paid first at the
corporate level and again
at the individual level
3
on dividends.

Business Ownership C-Corporation

Corporations have two main

advantages. They provide the greatest
shield from individual liability and are
able to raise capital while transferring
stock to shareholders. Corporations
are subject to federal income tax so
distributing earnings will help to
reduce your tax impact through
employer pension plans.
4

Holly and Angela Forge

Happy Feet Corporation
2010 Holly and Angela take their inheritance money and invest it in an
invention they purchased the patent for. The company is registered in
Delaware. Holly invests $5 million cash, and Angela invests $20 million. Of
that $20million, used $500k for legal processes to purchase the patent.
IRC 351 applies as the company is held by more than 80%.
2011- Sales are slow, and manufacturing costs are high. Consultants hired to
streamline processes to decrease costs and market more efficiently. IRC-172
Happy Feet has decided to carry forward their Net operating loss deduction.
2012 Happy Feet partners with Lori Grenier from ABCs Shark Tank to mass
produce and market invention. IRC 267 takes a place on the tax forms.
2013 Happy Feet is on an upswing with revenue recognition, but IRC 267
applies as we have a 3rd partner as a shareholder.
5

Happy Feet Incorporated

A tax preparer (our CFO) will be required sign off to complete the filing of
Happy Feets 2014 tax return.
6

Happy Feet Incorporated Balance

Sheet
(Millions of Dollars)
Assets

12/31/2012

12/31/2013

2012-2013
Change

12/31/2014

2013- 2014
Change

10,049.00

10,341.00

9,088.00

-961.00

1,253.00

Short-Term Investments

1,167.00

3,161.00

6,124.00

4,957.00

-2,963.00

Total Cash & Short Term

Inv.

11,216.00

13,502.00

15,212.00

3,996.00

-1,710.00

5,409.00

5,314.00

6,170.00

761.00

-856.00

384.00

294.00

376.00

-8.00

-82.00

5,793.00

5,608.00

6,546.00

753.00

-938.00

32,240.00

37,751.00

42,912.00

10,672.00

-5,161.00

476.00

364.00

344.00

-132.00

20.00

29.00

28.00

14.00

-15.00

14.00

56.00

56.00

46.00

-10.00

10.00

Total Current Assets

49,810.00

57,309.00

65,074.00

15,264.00

-7,765.00

Gross Property Plant and

Equipment

23,306.00

24,305.00

25,294.00

1,988.00

-989.00

Accumulated Depreciation

-13,993.00

7
-14,645.00

-15,070.00

-1,077.00

425.00

Cash and Equivalents

Accounts Receivable
Other Receivables
Total Receivables
Inventory
Finance Division Loans
and Leases, Current
Deferred Tax Assets,
Current
Other Current Assets

Happy Feet Incorporated Balance

Sheet Cont.
Net Property Plant & Equip.

9,313.00

9,660.00

10,224.00

911.00

-564.00

Goodwill

4,945.00

5,035.00

5,043.00

98.00

-8.00

Long-Term Investments

1,043.00

1,180.00

1,204.00

161.00

-24.00

Finance Division Loans and Leases,

Long Term

4,296.00

4,056.00

3,627.00

-669.00

429.00

209.00

209.00

209.00

0.00

0.00

Deferred Tax Assets, Long Term

5,892.00

6,753.00

2,939.00

-2,953.00

3,814.00

Other Intangibles

3,044.00

3,111.00

3,052.00

8.00

59.00

Other Long-Term Assets

1,434.00

1,583.00

1,291.00

-143.00

292.00

79,986.00

88,896.00

92,663.00

12,677.00

-3,767.00

Loans Receivable, Long Term

Total Assets

Happy Feet Income Statement

(Millions of
Dollars)

12/31/2012

12/31/2013

12/31/2014

2012-2013
Change

2013- 2014
Change

Revenues

68,735.00

81,698.00

86,623.00

12,963.00

4,925.00

Total Sales/Revenue

68,735.00

81,698.00

86,623.00

12,963.00

4,925.00

Cost of Goods Sold

55,739.00

68,556.00

73,193.00

12,817.00

4,637.00

Gross Profit

12,847.00

13,033.00

13,355.00

186

322

Selling General &

Admin Expenses,
Total

3,408.00

3,717.00

3,956.00

309

239

R&D Expenses

3,918.00

3,298.00

3,071.00

-620

-227

Other Operating
Expenses

7,326.00

7,015.00

7,027.00

-311

12

Operating Income

5,521.00

6,018.00

6,328.00

497

310

-386

35

56

Interest Expense

-477

-4429

Happy Feet Income Statement

Cont.
(Millions of Dollars)

Interest and Investment

Income

12/31/2012

12/31/2013

12/31/2014

2012-2013
Change

2013- 2014
Change

278

268

214

-10

-54

Net Interest Expense

-199

-174

-172

25

Other Non-Operating
Income (Expenses)

166

140

101

-26

-39

-119

-84

-96

35

-12

24

20

-20

16

EBIT

5,393.00

5,910.00

6,232.00

517

322

Income Tax Expense

1,382.00

2,007.00

1,646.00

625

-361

Earnings from
Continuing Operations

4,011.00

3,903.00

4,586.00

-108

683

4,018.00

3,900.00
10

4,585.00

-118

685

Loss on Sale of
Investments
Gain on Sale of Assets

Net Income

Tax Planning for Happy Feet

Corporate debt was used to purchase dividend
producing securities, but the dividends received are
not eligible for DRD treatment (Code Section 246A).
When Happy Feet owners (Holly & Angela) went on
ABCs Shark Tank in 2013 we partnered with Lori
Greiner to further the success of our business to
increase sales in Bed Bath & Beyond. We used the
corporate debt to process this business deal.
So first, the corporate entity is taxed at 35% to earn
the money required to issue the dividend. The
remaining 65% is disbursed to Lori Greiner who pays
23.8% in federal taxes. This
makes the true tax rate
11
for dividends 50.47%.

Planning Think Ahead

To help you in your planning its a good
idea to seek the help of a CPA, Attorney
and a Financial Planner.
Asset protection is important and here
are some other things you must be
taking into consideration like: Advance
Directives, DNR, guardianship of your
children, and planning for your
business.
12

Asset Management &

Protection
Assets Titled in a Trust
Generally avoid probate (Court
Supervised)
Maintain privacy (Compared to Wills
which are public record)
Provide for control of assets both
during life & after death.
Allow tax benefits
Can be structured to take care of your
family after you pass.
13

Family Dynamic
Father

Holly

Angela

Son Married

Daughter Divorced

No children

1- adopted child

No grandchildren

2 - Children under
18

God blessed us with amazing growth. We will begin issuing shares of

preferred and common stock to the trust for the next 4 years. Share
price $10,000. Long growth, with a diversified portfolio is expected to
benefit the owners and their families for many generations to come.
When the company has its 10 year anniversary we estimate the total
value to be approx. $70 million dollars. High compensation plans for
our executives helps to lower costs and ultimately reduce our tax
liability.
14

Estate Tax and Gift Tax

Provisions
The Estate Tax is a tax on your right to
transfer property at your death. It
consists of an accounting of
everything you own or have certain
interests in at the date of death!
Gift tax applies to the transfer of gift
of any property including money.
2015 Life time exclusion $5,430,000
15

Reason for Creating a

Trust
Tax Savings Minimize estate taxes on
gross estate.
The wealthy may use a trust Sec.
2503 (C) taxable gifts & Crummey
trusts to manage the asset of minors.
No double taxation deduction is
received for income distributed to its
beneficiaries. The beneficiary then
reports on their individual return.
16

Charitable Lead Trust

CLTs
The charitable lead trust provides
payments to many charities for a fixed
number of years. At the end the
remainder of the trust asset pass on to
non-charitable beneficiaries. This trust
has strict federal tax laws in order to
receive favorable tax treatment.
Qualified 501C3 must be recipient.
17

Example
Angela will receive a charitable income tax deduction
in the amount of $100,000 in year one.
All income earned by the trust, including capital
gains and amounts paid to charity, will be considered
earned by and, therefore, included in Angelas gross
income just as if the trust does not exist.
However, because Angela transferred tax-exempt
securities to the trust, she will not be required to
include the interest from the bonds in her gross
income.
However, any gains from the sale or redemption of
the bonds is produced will18 be taxable to Angela.

Dynasty Trust &

Benefits
Growth is transfer tax free compounding the
longer the trust continues the greater the
benefit
Provide long term security for your family for
generations to come
Minimize the impact of taxes on your estate
Maximize what your heirs receive
Eliminate potential loss of assets because of
a beneficiarys mismanagement or
misfortune.
Protect your assets from your beneficiaries
creditors in the years19ahead

Dynasty Example:
Assume you transfer $1 million to a Dynasty Trust.
The trust will benefit your child, grandchild, and
great-grandchild for their lives after which time the
remaining assets will pass outright to your great
great-grandchildren.
Assuming the trust balance grows by a net of 6% - 8%
annually.
In this case, when the trust ends, your great greatgrandchild would receive about $84 million.
If instead, you gave this $1 million outright to your
child, who in turn passed it down through each
succeeding generation, your great great-grandchild
would receive only about $8
million.
20
The Dynasty Trust has $76 million more in assets

Gifting Breakdown

Exhibit A

Dynasty Trust

Outright Gift

Grantors gift of $1 MM

$ 1,000,000

$ 1,000,000

Value at childs death

$ 4,549,383

$ 4,549,383

$ 0.00

$ (2,502,161)

Total

$ 4,549,383

$ 2,047,222

Value at grandchilds death

$ 19,525,364

$ 8,786,414

$ 0.00

$ (4,832,527)

Total

$ 19,525,364

$ 3,953,886

Value at great-grandchilds
death

$ 83,800,336

$ 16,969,568

$ 0.00

$ (9,333,262)

Less: 55% Federal Estate Tax

Less: 55% Federal Estate Tax

Less: 55% Federal Estate Tax

21

1040 Estate & Trust

Income

Line 1 Report the estates or trust share of all taxable interest that was
received during the tax year Ex: Cash accounts, Notes Loans, US Treasury
bills, US savings bonds and additional income received.
Line 4 Capital Gain or (Loss) and include Sch. D
22

1040 Estate & Trust

Deductions

Line 12 Fiduciary fees for administering the estate or trust during the
year.
Line 14 Attorney, accounting and tax return preparer fees
Line 18 Income Distribution Deduction to any beneficiaries during the
tax year and complete Schedule B. to determine the distribution. For
each beneficiary a K-1 will be created.
23

Analysis
The Dynasty Trust has $76 million more in assets
because of the magic of transfer tax-free
compounding which will be a nice nest egg for
Hollys children and grandchildren.
Highlights for Happy Feet in 2014 - achieved a
rapid growth on stock price; lowered cost in
expenses in comparison to competitors.
By Partnering with a Shark Tank Exec-Happy Feet
enhanced our ability to reach new markets for
our C-Corp and increase profitability by 30% in
2014, while mitigating our tax liabilities both
personally and from a corporate perspective.

Analysis Cont.
Happy Feet, Inc. was pleased with
nearly a full in 2014 5 EPS, ROE, &
Stock Price as our closest competitor
Dr. Scholl's.
Happy Feet gained traction in the market in 2013
becoming a formidable competitor.
Lesson learned- Was continuing domestic
manufacturing and not selling all capacity sooner,
and/or offering discounted pairs, lead to extremely
high inventory turnover. In the end we turned out a
25
nice profit and successfully
maneuvered Happy Feet

IRC-246 Rules applying to deductions for

dividends received
IRC-172 Net operating loss deduction
IRC 382 Limitation on net operating loss carry
forwards and certain built-in losses following
ownership change
IRC -351 Transfer to corporation controlled by
transferor
IRC 267 Losses, expenses, and interest with
respect to transactions between related
taxpayers

Works Cited: References

Works Cited: References

IRC Code 4947 Application of taxes to certain

nonexempt trusts
IRC Code 2503 Taxable Gifts
IRC Code 401 Qualifies Pension & Stock
bonus plans
IRC Code 170 Charitable, Contributions &
Gifts
IRC Code 671 Trust Income Deductions &
27
Credits

Sole
Proprietorship
Coffee Shop
By:
Lauren Rogers
28

$25 Million Inheritance

$10 million in a revocable trust/ asset
protection trust
Invest $8 million in stocks and bonds
$2.5 million to start up a small business
Catering & Coffee Shop
Sole Proprietorship
$4.5 million to purchase Oceanside
properties
Generate income from rental properties
Take out life insurance policies on myself
and my assets
29

Reasons for Selecting a Sole

Proprietorship

My sole proprietorship will not be subject to

taxation as its own entity.
I will be taxed according to my personal
marginal rate on income.
I have the ability to contribute cash to, or
withdraw profits from, my business without
tax consequences.
I may contribute property to, or withdraw
property from, my business without
recognizing gain or
loss.
30

Reasons for Selecting a Sole

Proprietorship

Business losses may offset some of my

individual income, such as earned salary
from the sole proprietorship.
Non-Tax:
I prefer to work alone i.e. Be My Own
Boss
My small business does not require
partners
Accounting & record
keeping purposes
31

Taxes - Sole Proprietorship

The main difference between reporting income from

my sole proprietorship and reporting wages from a
job, is that I must list my business profit or loss
information on a Schedule C.
Sole proprietors must make contributions to the
Social Security and Medicare systems, aka SelfEmployment Taxes
While regular employees contribute to these
programs through deductions from their
paychecks, sole proprietors must make their
contributions when
paying their other income
32
taxes.

Sole Proprietorship
The self-employment tax rate for 2015 is
15.3% of the first $118,500 of income and
2.9% of everything above that amount.
To incorporate a sole proprietorship in the
State of Delaware, I will need to obtain a
Delaware business license from the
Delaware Division of Revenue.
I must register an EIN with the IRS.
A sole proprietorship can be established
without filing any legal documents with the
DE Secretary of State.
33

34

Estate Planning

After 20 years of success with my coffee shop

and catering business, I decide to retire. As
the sole proprietor of the organization, the
business closes down upon my exit.
With several rental properties, life insurance
policies, and solid growth with my stock and
bond investments, I decide to start estate
planning.

35

Estate Planning
Credit Shelter Trust

Structured so that upon the my death, the assets

specified in the trust agreement (up to a specified
maximum dollar value) are transferred to the
beneficiaries named in the trust.
Key benefit to this type of trust is that the
spouse maintains rights to the trust assets and
the income they generate during the remainder
of his or her lifetime.
My surviving spouse may even tap into the
principal of the trust assets for healthcare
emergencies.
A type of trust that allows a married investor to
avoid estate taxes when passing assets on to heirs.
36

My real estate and rental properties will be included

Estate Planning
Charitable Trust

My Charitable Trust will have two charitable

beneficiaries. If properly established under federal
tax laws, a charitable trust will entitle a grantor to
deduct a portion of the amount contributed to the
charitable trust as a current charitable income tax
deduction.
Charities of Choice:
National Alliance to End Homelessness
Animal Welfare Institute
Upon my death, the amount passed on to my
charities will qualify for a charitable estate tax
deduction.
37

Estate Planning
Life Insurance Trust
I will create an irrevocable trust, naming my
husband as the beneficiary. Then I will transfer my
life insurance policies into the trust and the
beneficiary becomes owner of the policy.
I will no longer have any control over the insurance
policies, but through the terms of the trust I can
determine who will have control, how premiums will
be paid, who will benefit from the trust, and how
payments should be made.
Three important requirements:
* The trust must be irrevocable
* I cannot be the trustee of the trust
* The trust must exist for at least three years before
38
death

Analysis
The payout from my charitable trust can be used as a tax
deduction on my income and estate after death.
Using a Credit Shelter Trust for my properties will
significantly reduce taxes. Once my surviving spouse
passes away, the properties will be passed on to our
children without penalties.
My investments (stocks, bonds) will be passed on to my
spouse using a Transfer on Death form. At which point he
may make investment decisions and/or place in a trust for
our children after his own death.
The goal of the Life Insurance Trust is to avoid federal
taxation. If a life insurance policy is owned by a grantor,
the death benefits are included in the grantor's estate for
federal estate taxes- because the grantor has the power
to designate beneficiaries to receive the death benefits.
This is why this must be an irrevocable living trust.
39

LLC Limited Liability

Company

The Fitness Equipment

Store, LLC
By:
Lakeya Johnson
40

$25 Million
Inheritance
Contact a wealth planner & obtain a
lawyer
Invest $6 Million in new Company
The Fitness Equipment Store, LLC

Limited Liability Company

Partnership with husband Steven
Beck (Fitness Guru to the stars)
Four show rooms/retails stores in
Delaware and Maryland
Plans to
41 expand to Virginia, DC,
and New Jersey in 2015

$25 Million Inheritance

Cont.
Invest $2 Million in stocks and bonds
Donate $2 Million to local churches and
several communities in Maryland and
Delaware
Obtain life insurance for me and my
husband to cover business and
personal obligations
Place $10 Million in an Asset Protection
Trust
42

Why Limited Liability

Company?

Limits my personal liability for

business debt
Provides the ability to transfer
ownership of company at some point
Saves tax through pass through
taxation
Enables the business to continue
beyond my lifetime
Requires fewer Corporate formalities
such as annual meetings and record
43

Delaware Limited Liability

Company

Apply & received Federal Tax ID #

Choose LLC Name The Fitness Equipment
Store, LLC
File a certificate of formation with DE
Division of Corporations

Appoint Registered Agent

Prepare an Operating Agreement

Pay State Tax Obligations - $250 Franchise

Tax fee
44

The Fitness Equipment Store, LLC

1065 Form

45

The Fitness Equipment Store, LLC

Form 1065 Form Cont.

46

The Fitness Equipment Store, LLC

1040 Form

47

New Partner?
Paul Short, owner of Gym Source headquartered
in New Jersey expressed interest in partnering with
The Fitness Equipment, LLC
Details of Partnership
Gym Source is an accredited company
Mr. Short is respected in the industry and
previously worked with my husband Steven
Reasons for partnership
Expansions Potential
Competition
48

New Partner Cont.

Paul Short, owner of Gym Source proposal
Equipment
$2 Million Basis
$1Millions FMV
Cash $1Million
Equal Partners
Lakey
a
Steven Paul
3
3
2
Cash
Million Million Million
49
2
Equipmen

Basis
FMV
8
8
Million Million
2

Estate Planning
Shawn & Lakeya
2 Children Shawn Jr. & Lisa
10 years after Business start-up
Business appraised
Turn appraised amount into shares/units
Each year the children will receive 25,000
units valued at $200 share
Unit distribution will save us 50% on gift taxes
50

Estate Planning Cont.

Charitable Remainder Trust
Purchase property
Transfer property to Cancer Society (Trustee)
Income portion payments Lakeya (% of trust
assets)
Terms Lifetime
Property goes to Cancer Society
Tax Advantages
Income deduction
Estate Tax
Capital Gains Tax
51

Estate Planning Cont.

Irrevocable Life Insurance Trust
Trust owns the life insurance policy
No policy control
Premiums paid by me with money transferred to
trust below the $28,000 gift tax amount
Trust receives death benefits at the time of my
death
Funds will be transferred to by beneficiaries
named on the policy
Avoid estate taxes proceeds arent taxed
52

Estate Planning Cont.

Bypass Trust
Shawn & I will leave property to each other
Limited power to access trust during lifetime
Allowed to withdraw principal to provide for
health, education, maintenance, or support the
living spouse or children
Trust receives death benefits at the time of my
death
Benefits
Property will be taxed one between spouses
Property not subject to estate taxes upon
death of spouse 53

Conclusion
Contact wealth advisor after I receive my
inheritance
All companies set up as a LLC
Units distributed to children will give them
ownership in the family business
My husband, Shawn will receive
everything at the time of my death
Establish trust and make sure my entire
family is educated on estate planning
54

References
IRC 701 Partners, not partnership,
subject to tax
IRC 721 Nonrecognition of gain or loss
on contribution
IRC 751 Unrealized receivables and
inventory items
IRC 704 Partners distributive share
55