You Decide Smithon Debt to Equity Issue

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Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith company – would that raise debt to equity issues? A: A straight purchase of Smithon is the simplest transaction, and probably the lease costly in terms of administrative matters. Purchasing Smithon with debt could raise debt issues with Johnson, if the Johnson's current cash flow is insufficient to meet the debt service requirements to bond purchasers. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end? A: Converting Smithon to an S corporation has merit if the goal is for Smithon to remain controlled by a small number of shareholders. However, the equipment deductions for the corporation may be more valuable than it would be to Johnson personally. Either way, Smithon's value to Johnson will be the same, if he purchases Smithon outright. Changing to a calendar year end has little useful effect, and it requires that Smithon produce a short-year tax return from Dec to Jan, which is a relatively unnecessary administrative expense. What potential income tax ramifications exist for Mr. Johnson personally if he purchases the stock of Smithon and converts it to an S corporation? A: Mr. Johnson will be personally taxed on all of Smithon's income. This has the advantage of eliminating the double taxation usually associated with a C-Corporation. However, it will increase Johnson's current tax liability. There is usually no advantage to an S-corporation for a wealthy individual who is already in the top tax bracket. S-Corporation income tends to favor start-up businesses and taxpayers with little income, because the corporation is taxed at the individual's lower personal income tax rate. Should Mr. Jones merge Johnson Services with Smithon? What
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