Reference no: EM133142966

Question - Birch Corporation, a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corporation in the amount of $9,700. Birch Corporation has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $32,200 business loss.

What amount of the loss clears the tax-basis limitation, and what is James's basis in his Birch Corporation stock and Birch Corporation debt in each of the following alternative scenarios?

a. At the beginning of the year, James's basis in his Birch Corporation stock was $45,400 and his basis in his Birch Corporation debt was $9,700.

b. At the beginning of the year, James's basis in his Birch Corporation stock was $10,250 and his basis in his Birch Corporation debt was $9,700.

c. At the beginning of the year, James's basis in his Birch Corporation stock was $0 and his basis in his Birch Corporation debt was $9,700.

Adam Fleeman, a skilled carpenter, started a home improvement business with Tom Collins, a master plumber. Adam and Tom are concerned about the payroll taxes they will have to pay. Assume they form an S corporation and each earns a salary of $62,000 from the corporation; in addition, they expect their share of business profits to be $75,500 each.

How much Social Security tax and Medicare tax (or self-employment tax) will Adam, Tom, and their corporation have to pay on their salary and profits? (Assume Adam and Tom are paying themselves reasonable salaries.)