How much federal income tax could Max save (or pay additional) in 2022 if he had converted LS from a sole proprietorship to a C Corp?

Accounting by Geoffrey

Excel in company analytic.

Max opened Learning Smart (LS) as a sole proprietorship, providing online education to school-age kids, specializing in art and STEM. Business has been booming since started. In 2022, he provided the following financial information relating to his business. LS is using accrual method of accounting.

Financial Information:

  1. During the year, LS sold 15,000 learning hours for $450,000.
  2. In April 2022, LS acquired new computers and online teaching accessories in the amount of $25,000 to be used in the business. LS intends to take §179 expenses.
  3. A franchised learning center (Komon) contracted with LS to offer customized classes. Komon paid LS $150,000 ($25 per learning hour) on June 30 th as a prepayment for LS to provide 500 hours per month from July 1st , 2022 to June 30 th 2023. LS elects to use the deferral method to account for the transaction.
  4. In June, Max travelled to an education conference held in Boston, MA. Max felt it was a great opportunity to learn current trends and gain potential cooperation opportunities with school districts and large training centers. The conference was for two days. Max paid $800 round-trip airfare, $250 for conference registration fees, $150 per night for lodging, $96 for cab fare, and $80 per day for meals at restaurants during the trip.
  5. At the end of the year, Max estimated that 5 percent of the year-end receivable $86,000 is not collectible, but it has not been able to specifically identify any accounts to write off.
  6. LS’s cost of goods sold is mainly the instructor hours. Due to the expansion of the business, Max hired three full-time instructors to work for LS and paid them each $60,000 annual salaries. To encourage retention, LS accrued $15,000 bonuses for each instructor at year-end. The bonus was paid on March 1, 2023.
  7. Max also hired his teenager son to work part-time doing administrative work for the business. He paid his son $30 per hour for 250 hours. However, the market hourly rate for similar type of work is $15 per hour.
  8. On July 1 st , LS moved out of Max’s basement and rented a new office in city center plaza. LS signed a contract for a two year lease with monthly rent of $2,000. When signing the lease, LS paid $4,000 for the first and last month rent deposits as well as $5,000 for safety deposit.
  9. LS purchased new office furniture and fixtures for the new office in the amount of $11,000, intend to take §179 expensing.
  10. In June, LS purchased a patent for an online interactive platform for $45,000. This patent expires in 10 years.
  11. On July 1 st , LS purchased and paid for a 12-month insurance policy that covers its business property. The policy costs $4,800.
  12. LS paid utility expenses of $3,000.
  13. Early January, before Max launched his business, he spent $9,000 investigating different business models and opportunities. Max considered this as a start-up cost.
  14. After receiving the prepayment from Komon, LS invested in different investment portfolios. At the end of the year, LS received $1,500 interest from a municipal bond and $2,500 from corporate bond.
  15. In November, LS signed a one-year contract with an advertising company to produce an ad campaign. LS paid $4,200 up-front and LS will paid additional $2,000 if sales increase by 20% after six months period.
  16. Max spent a lot of time visiting clients during the first half of the year (January to June) to develop his business. Max visited clients driving his personal car. He drove a total of 3,000 miles for client visits. He also received $80 parking tickets. LS reimbursed his business mileage and parking tickets.
  17. While visiting clients, sometimes Max invited clients to NBA games or to shows, incurred a total costs of $6,500.

Required:

  1. Calculate LS’s business taxable income for year 2022 (17 points).
  2. What is Max’s 2022 tax liability assuming Max files as a single for 2022. Ignore any potential tax credits, self-employment, or employment taxes (2 points)
  3. What are Max’s federal tax return filing deadline and payment deadline for 2022 taxes (2 points)?
  4. What is Max’s:
  • a. Average tax rate (3 pts)
  • b. Effective tax rate (3 pts)
  • c. Marginal tax rate (3 pts)
  1. How much federal income tax could Max save (or pay additional) in 2022 if he had converted LS from a sole proprietorship to a C Corp? (5pts)