On creating a new 100 percent-owned corporation, Ben was advised by his tax consultant to treat 50 percent of the total amount that was invested as a loan and 50 percent as a purchase of corporate stock. What tax advantage does this arrangement have over structuring the entire investment as a purchase of stock? Discuss (AICPA adaptive).
This is a very common methodology used and abused in the real world of business, and particularly with corporations electing "S" status.
The tax advantages of splitting the investment between debt and capital primarily relates to the tax character of funds withdrawn from the corporation. Because of differences in terminology and tax treatment, each type of corporation will be discussed separately.
1. Showing part of the investment as a note payable to a shareholder can often cause an issue when dealing with majority ownership in a corporation. Debt will not be used for calculating number of shares and therefore the percentage of ownership for control of business decisions. It is not an issue currently in this corporation because it is 100% owned, but should more stock be issued to an incoming shareholder, there ...
New corporation tax advantages are provided. The arrangements over structuring the entire investment as a purchase of stocks are discussed.