Mike owns a snowmobile manufacturing business, and Bill owns a mountain bike manufacturing business. Because each business is seasonal, their manufacturing plants are idle during their respective off-seasons. Mike and Bill 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%. Mike and Bill own their businesses as sole proprietors and provide the following summary of their 2013 taxable incomes:


Mike Bill
Business income
Sales $600,000 $450,000
Cost of goods sold (400,000) (300,000)
Other expenses (100,000) ( 75,000)
Business taxable income $100,000 $ 75,000
Other taxable income
(Net of allowable deductions) 20,000 35,000
2010 taxable income $120,000 $110,000

Mike and Bill 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, Mike will own 60% of the business and Bill will own 40%. They each require $70,000 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 2013 tax rate schedules to compute the tax for each year of the analysis.

the sales increase in the second and third years. You should increase yearly sales by 15%, so that next year combined sales are 1207500, then the next year, 1388625, etc.

Use an Excel spreadsheet!