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Suppose an employer has a project that yields $400,000 of net income in odd year

Suppose an employer has a project that yields $400,000 of net income in odd years and $100,000 of net operating losses in even years.

In situation one, the employer is a corporation and they have

  • a tax rate of 21% when the company has net income and 0% when a company has a net loss; or
  • a tax rate of 21% and NOLs can be carried back two-years and forward indefinitely.
  • a tax rate of 35% when the company has net income and 0% when a company has a net loss; or
  • a tax rate of 35% and NOLs can be carried back two-years and forward indefinitely.

In situation two, the employer is a flow-through entity and they have

The employer wants to hire you. However, you demand a salary of $75,000 per year and your tax rate is 35% in both situations because of your other income.

Part 1: What is the true cost to the employer if you are hired? Also, your employment contract is in increments of 2 years (i.e., 2, 4, 6, etc.).

Part 2: What amount of after-tax income are you demanding in both situations?

Part 3: What alternative strategy might the employer and you negotiate whereby one or both of you are better off but neither is worse off?

Note 1: To do a complete analysis and be able to compare alternatives, you may need to add a 7th year in some situations.

Note 2: In solving this case, I suggest that you use Excel and create four tables, such as:

  • Table 1 for the corporate form with carryforward election,
  • Table 2 for the corporate form with carryback election,
  • Table 3 for the flow-through entity form with carryforward election,
  • Table 4 for the flow-through entity form with carryback election.

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