Reference no: EM132663447

Problem - Deductibility of Losses and the Choice of Business Entity

Cane, Inc., has been a C corporation for a number of years, earning taxable income of less than $100,000 per year. Thus, the business has been subject to the lower C corporation tax rates, but due to cheap imports from China, Cane's two owners, Smith and Jones, expect operating losses for the next two or three years. They hope to outsource some of the manufacturing to Vietnam and turn the company around. How can they deduct these anticipated future losses?

The corporation receives some tax-exempt income, generates a small amount of passive investment income, and holds some C corporation earnings and profits. Each owner draws a salary of $92,000. Cane has issued two classes of stock, voting and nonvoting common. Cane is located in Texarkana, Texas. Smith lives in Texas, and Jones lives in Arkansas. Both are married to nonresient aliens.

Should Smith and Jones elect to have Cane treated as an S corporation?