Facts and Objectives
Facts
Mr. Heeler’s business will specialize in restoring and curating rare, stylish historical finds with a modern edge. The shop showcases a unique collection of urban relics, from vintage architectural fragments and reclaimed industrial artifacts to rare cultural objects that echo the city’s hidden history. Alongside authentic artifacts, Bandit’s Urban Archeology will offer carefully crafted reproductions, manufactured to capture the essence and detail of original pieces, allowing clients to bring a touch of history into their own spaces. Each item, whether original or reproduction, is meticulously preserved or artistically repurposed, blending ancient character with contemporary aesthetics. Ideal for history enthusiasts, interior designers, and urban dwellers with a taste for chic nostalgia, Bandit’s Urban Archeology brings a refined approach to celebrating and reimagining the past.
The company will be 100% owned by Mr. Heeler.
The company will be funded by Mr. Heeler contributing $1,000,000 in cash plus machinery to be used in manufacturing reproduction pieces. The machinery has a fair market value of $300,000 and a cost basis of $200,000. The placed in-service date will be 1/15/25 and the recovery period will be 7 years.
In the company’s initial year of operations, Mr. Heeler plans to take money from the company (some combination of wages and distributions) equal to $100,000 for his efforts.
Objective
Using the information provided by Mr. Heeler, estimate the total tax burden that the business entity and Mr. Heeler will face in tax year 2025 if the business were to operate for federal tax purposes as 1) a C-Corporation, 2) an S-Corporation, or 3) a Sole Proprietorship (Schedule C). Then, make a recommendation to Mr. Heeler about which type of federal tax classification he should choose for Bandit’s Urban Archeology, LLC (and what steps he would have to take to choose that entity classification).
In addition to your primary analysis, Mr. Heeler wants you to address the following questions and how the answers may vary among the federal tax classification choices (note, your team may need to do additional research):
How does the potential expiration/extension of various TCJA provisions impact your analysis and recommendation?
What are the tax consequences of Mr. Heeler’s initial contribution of cash and property to the company?
How would changing the amount of money taken out of the company impact your calculations (i.e., what would happen if Mr. Heeler increased or decreased the amount of distributions taken).
Would the optimal federal tax classification vary depending on whether Mr. Heeler decides to sell the business at some point in the not-so-distant future?
Should the company attempt to maximize depreciation deductions in Year 1? Or, should the company spread them more evenly over several years?
What happens if Mr. Heeler’s projections are wrong and the company loses money (i.e., how are losses treated by each entity type)?
How easy is it to switch the company’s tax classification later from what you recommended? That is, what is the process to switch (e.g., is there some kind of election, or revocation of an election, that must be made)? Would the switch be taxable or nontaxable?
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