What Potential Income Tax Ramifications Exist for Mr. Jones Personally If He Purchases the Stock of Smithon and Converts It to an S Corporation?

If Mr. Jones purchases the stock and converts the company to an S corporation, all the Smithon Manufacturing’s income, losses, deductions and credits will have to be reported in Mr. Jones’s personal income tax return Form 1040 as being sole shareholder (see IRS, (2012). S Corporations. Retrieved from website: http://www.irs.gov/businesses/small/article/0,,id=98263,00.html. The S corporation must file a return on Form 1120S each tax year even though the corporation may not be subject to tax, so Smithon Manufacturing is avoiding the double taxation on the corporate income. If in the first two years the S company might have losses (as mentioned by Mr. Jones), as a result, Mr. Jones will have a lower annual income and a lower tax liability, but in the following years, when the S corporation might become again very profitable, Mr. Jones will have a higher resulting annual income and a higher tax liability.

If Mr. Jones purchases the stock and converts the company to an S corporation, all the Smithon Manufacturing’s income, losses, deductions and credits will have to be reported in Mr. Jones’s personal income tax return Form 1040 as being sole shareholder (see IRS, (2012). S Corporations. Retrieved from website: http://www.irs.gov/businesses/small/article/0,,id=98263,00.html. The S corporation must file a return on Form 1120S each tax year even though the corporation may not be subject to tax, so Smithon Manufacturing is avoiding the double taxation on the corporate income. If in the first two years the S company might have losses (as mentioned by Mr. Jones), as a result, Mr. Jones will have a lower annual income and a lower tax liability, but in the following years, when the S corporation might become again very profitable, Mr. Jones will have a higher resulting annual income and a higher tax liability.

If Mr. Jones purchases the stock and converts the company to an S corporation, all the Smithon Manufacturing’s income, losses, deductions and