Al has been operating a successful wholesale business for many years. He has been reporting his income on schedule C.
His balance sheet as of December 31, 2015 was
Machines and Equipment
Macrs allowed 750,000
There are no accounts payable or accounts receivable.
The business has been growing and he is concerned about liability so he formed Al Inc. on January 2, 2016 and transferred all his assets to Al Inc. in exchange for 95 shares of stock. He sold 5 shares to outsiders for $10,000 each.
He needed to build a larger facility. Al Inc. purchased a building for $1 million using the 50,000 he got for sale of the stick and a 950,000 bank mortgage for the balance. Al Inc. will be paying interest only for 10 years and then paying principal.
His pro-forma income statement for 2016 is
Cost of goods sold 3,500,000
Bank interest on mortgage 200,000
MACRS on building 500,000
Salary to himself 200,000
Besides the income from Al Inc., he has 10,000 in dividend income and itemized deductions of 20,000. He is single.
One of the people who purchased one share of Al Inc. is a British citizen and resident. That disqualifies Al Inc. from electing Sub-S treatment.
Compute the 2016 income and tax for Al personally and Al Inc.
If you were his accountant are there any suggestions you would make?