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One of your wealthy clients, Cecile, invests $100,000 for sole ownership of an electing S corporation's stock. The corporation is in the process of developing a new food product. Cecile anticipates that the new business will need approximately $200,000 in capital (other than trade payables) during the first two years of its operations before it starts to earn a sufficient profits to pay a return on the shareholder's investment. The first $100,000 of this total is to come from Cecile's contributed capital. The remaining $100,000 of funds will come from one of the following three sources:
1. Have the corporation borrow the $100,000 from a local bank. Cecile is required to act as a guarantor for the loan.2. Have the corporation borrow $100,000 from the estate of Cecile's late husband. Cecile is the sole beneficiary of the estate.3. Have Cecile lend $100,000 to the corporation from her personal funds.
The S corporation will pay interest at a rate acceptable to the IRS. During the first two years of operations, the corporation anticipates losing $125,000 before it begins to earn a profit. Your tax manager has asked you to evaluate the tax ramifications of each of the three financing alternatives. Prepare a memorandum (citing applicable sources, such as the IRC) outlining the information you found in your research.
Corporate Law Case Studies, case for Designco Pty ltd designs, manufactures and distributes craft kits for children, case for Andrew and Belinda are the only shareholders and directors of Sailors Pty Ltd
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