Biko owns a snowmobile manufacturing business, and Miles owns a mountain bike manufacturing…

Biko owns a snowmobile manufacturing business, and Miles
owns a mountain bike manufacturing business. Because each business is seasonal,
their manufacturing plants are idle during their respective off-seasons. Biko
and Miles have decided to consolidate their businesses as one operation. In so
doing, they expect to increase their sales by 15% and cut their costs by 30%.
Biko and Miles own their businesses as sole proprietors and provide the
following summary of their 2009 taxable incomes:

Biko and Miles don’t know what type of entity they should
use for their combined business. They
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Biko owns a snowmobile manufacturing business, and Miles
owns a mountain bike manufacturing business. Because each business is seasonal,
their manufacturing plants are idle during their respective off-seasons. Biko
and Miles have decided to consolidate their businesses as one operation. In so
doing, they expect to increase their sales by 15% and cut their costs by 30%.
Biko and Miles own their businesses as sole proprietors and provide the
following summary of their 2009 taxable incomes:

Biko and Miles don’t know what type of entity they should
use for their combined business. They would like to know the tax implications
of forming a partnership versus a corporation. Under either form, Biko will own
55% of the business and Miles will own 45%. They each require $60,000 from the
business and would like to increase that by $5,000 per year.

Based on the information provided, do a three-year
projection of the income of the business and the total taxes for a partnership
and for a corporation. In doing the projections, assume that after the initial
30% decrease in total costs, their annual costs will increase in proportion to
sales. Also, assume that their nonbusiness taxable income remains unchanged.
Use the 2010 tax rate schedules to compute the tax for each year of the
analysis.

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