| Course | AC507 Business Taxation and Strategies |
|---|---|
| Unit | Unit 10 |
| Paper type | Planning recommendation memo |
| Length | About 880 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC507 Unit 10
A C Corporation From Day One, With Four Priced Contingencies: A Unit 10 Planning Memo for a Surgical-Instrument Startup
[Student Name]
Purdue University Global
AC507: Business Taxation and Strategies
Unit 10 Planning Recommendation Memo
[Instructor Name]
[Date]
The founders, the startup and every figure are composite; the statutes and publication cited are real; the small business stock rules reflect the 2025 amendments; this is coursework analysis, not tax advice.
Memorandum
To: Dr. Ana Ruiz and Dr. Wei Chen, founders From: Tax Analyst Date: February 2, 2027 Re: Entity choice for the instrument company
Incorporate now as a C corporation and issue your founder shares at formation. The structure fits venture financing, and if the company is sold in a stock sale after five years, each of you could exclude up to $15 million of gain from federal tax. The cost is that the projected $1,500,000 of early losses stay inside the corporation instead of reducing your personal taxes.
Facts
You expect to fund development yourselves for about a year, raise a seed round of about $3 million from venture investors within eighteen months, and lose about $1,500,000 over the first three years before sales begin. Your goal is a sale of the company around year seven, when comparable companies have sold for $40 million to $60 million.
Part 1: Why Not a Partnership or an S Corporation
The S rules allow a single class of shares and limit owners to individuals, estates and a few kinds of trusts (Small business corporation defined, 26 U.S.C. § 1361, 2018). Venture funds invest through partnerships and require preferred stock with liquidation preferences, so an S corporation would have to terminate its election at the first round. An LLC filing as a partnership could pass losses through to you, but many venture funds avoid investing in partnerships because the income would flow through to their own tax-exempt and foreign investors. You would likely have to convert before the first round, and the small business stock holding period would only begin then.
Part 2: The Small Business Stock Exclusion
Stock acquired at original issue from a domestic C corporation engaged in a qualifying business, with gross assets below the statutory limit when the stock is issued, can qualify for an exclusion of gain on sale (Partial exclusion for gain from certain small business stock, 26 U.S.C. § 1202, 2025). For stock issued after July 4, 2025, the exclusion is 50 percent after three years, 75 percent after four and 100 percent after five, capped for each taxpayer at the greater of $15 million or ten times the stock's basis. Medical device manufacturing is a qualifying business; professional health services would not be, so the company should stay a product company, not a clinical practice.
If each of you holds stock worth $20 million at a sale in year seven, each could exclude $15 million of gain. At a 23.8 percent combined rate on capital gains, the exclusion saves each of you about $3,570,000.
Incorporating at formation starts the five-year holding period on the day your shares are issued, at a near-zero value, so the whole of the company's growth can fall inside the exclusion, while converting later would start the clock over and shorten the window.
Part 3: The Cost
The $1,500,000 of losses would remain on the corporation's books as a loss carryforward that only the company's own future profits can absorb. Passed through, they might have saved you about $480,000 of personal tax, at roughly 32 percent, if you had other income to absorb them. Inside the corporation, the losses will be worth about $315,000 at 21 percent once the company is profitable, though a change in ownership from later funding rounds can limit their use. This cost is small beside the potential exclusion.
Part 4: Four Contingencies, Priced
The round slips. If funding takes three years rather than eighteen months, the C corporation still works; the holding period has already started. Cost: losses are trapped longer, perhaps $100,000 more of deferred benefit.
An early sale. A sale in year four rather than year seven would exclude only 75 percent of the eligible $15 million, leaving $3.75 million more taxable; in year three, half, leaving $7.5 million more. That is at least $893,000 or $1,785,000 more tax per founder, and more if the taxable part of the gain falls under the higher rate the code applies to it. Negotiate earn-outs or rollover equity if an offer comes early.
An asset sale. If a buyer insists on buying assets, the exclusion is lost entirely, and the corporation pays 21 percent on its gain before distributing what remains. On a $50 million asset sale, corporate tax could exceed $10 million. Keep intellectual property in the corporation and clean, so that a stock sale is practical.
Growth beyond the asset limit. Shares issued after the corporation's gross assets exceed the statutory limit, $75 million under the amended rules, do not qualify. Your founder shares, issued now, are protected; later employee grants might not be.
Next Steps
Incorporate in Delaware, issue founder shares this month with vesting, file Section 83(b) elections within thirty days, and keep records that support qualification, including gross asset values at each issuance (Internal Revenue Service, 2025).
References
Internal Revenue Service. (2025). Corporations (Publication 542). U.S. Department of the Treasury.
Partial exclusion for gain from certain small business stock, 26 U.S.C. § 1202 (2025).
Small business corporation defined, 26 U.S.C. § 1361 (2018).
The Purdue Global AC507 Unit 10 instructions
The final AC507 unit asks you to recommend a tax structure for a client's plan and prepare for changes to that plan. Open with the recommendation and its main reason. State the facts that drive the choice, including financing, expected losses and exit. Explain why the alternative forms do not fit, with the rules that rule them out. Explain the main benefit of your choice with its conditions and an estimate of its value. Price the cost of the choice. Then identify the contingencies most likely to change the plan, and for each, estimate the effect and say what the client should do. End with dated next steps the client can take immediately. Write for the clients, not an instructor. Reference the governing statutes and IRS guidance in APA 7, noting any recent amendments you rely on.
Inside the AC507 Unit 10 example
The sample memo recommends a C corporation and changing nothing about founder share timing. Facts set out self-funding, a $3 million seed round, $1,500,000 of early losses and a target sale. Part one explains why the one-class rule and fund preferences rule out an S corporation and a partnership. Part two describes the small business stock exclusion as amended in 2025, estimating about $3,570,000 saved per founder on a $20 million sale. The highlighted sentence explains why issuing shares now matters. Part three prices trapped losses. Part four covers a delayed round, an early sale at 75 or 50 percent exclusion, an asset sale and the gross asset limit, before next steps including section 83(b) elections.
AC507 Unit 10 rubric: what earns full points
Planning memos in AC507 earn points for a recommendation grounded in the client's plan and accurate statements of the governing rules. Graders check the S corporation eligibility limits, the conditions for the small business stock exclusion and how recent amendments change the holding periods and caps. The rubric rewards pricing both the benefit and the cost of the choice and identifying realistic contingencies with estimates and responses. Next steps that the clients can act on show practical judgment. Memos that recommend a form without connecting it to financing and exit, or that state outdated exclusion rules, lose credit. The memo should speak to the founders, lead with its advice and reference the statutes and IRS guidance in APA 7 style.
Common AC507 Unit 10 mistakes, and how to avoid them
Weak Unit 10 memos list the features of each entity without tying them to the founders' plan. Others recommend an LLC for loss pass-through without considering what venture investors require. The small business stock exclusion is described with pre-2025 rules or without its conditions. The cost of trapped losses is ignored, so the recommendation looks free. Contingencies are named but not priced. Next steps are missing, so the founders do not know to issue shares and file elections now. If your section's clients plan a different exit or financing path, a writer can rebuild the recommendation and contingencies around it.
Get an AC507 Unit 10 example written to your instructions
With the Unit 10 client's plan, projected losses, financing expectations, exit horizon and the grading rubric at hand, the memo is drafted recommendation-first, each rejected form eliminated with authority and every contingency given a consequence and a bracketed cost. It is delivered within 24-48h; a first custom sample comes without charge. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
More AC507 papers and MS in Accounting samples
- AC507 Unit 1: LLC vs S Corporation Discussion
- AC507 Unit 2: Business Entity Selection Memo
- AC507 Unit 3: Partnership Outside Basis Problem
- AC507 Unit 4: Corporate Property Distribution Problem
- AC507 Unit 5: Stock Redemption Analysis
- AC507 Unit 6: Corporate Liquidation Problem
- AC507 Unit 7: S vs C Corporation Cash Flow Analysis
- AC507 Unit 8: Built-In Gains Tax Seminar Reflection
- AC507 Unit 9: Tax-Free Reorganization Case Study
- AC505 Unit 10: Divisional Performance Report
- AC504 Unit 10: Professional Judgment Paper
- AC503 Unit 10: Audit Report Analysis
- AC502 Unit 10: Business Legal Risk Memorandum
AC507 Unit 10 questions, answered
Why not start as an LLC and convert when the investors arrive?
Converting is possible and common, but it has a cost the memo prices. Under Section 1202(i), stock received for contributed property takes a basis equal to that property's value, and only appreciation after the conversion can qualify for the exclusion. For a company expected to gain most of its value early, forming the corporation at the start keeps that value inside the potential exclusion.
What does Section 382 do to the startup's losses?
After an ownership change, broadly a shift of more than 50 percentage points among five-percent holders within three years, the corporation's use of earlier losses is capped each year at its value times a published long-term tax-exempt rate. Successive venture rounds can trigger one. The memo names the risk and suggests tracking ownership shifts, since a startup with a low value may find its losses nearly unusable.
Does the memo decide the founders' personal tax outcome?
No. It is coursework built around composite founders and made-up forecasts, meant to show how an AC507 recommendation answers a stated plan. A real decision would depend on state law, the investors' actual terms and the law as it stood when the shares were issued, all checked at the time. Its citations exist so the reasoning can be checked, never so a founder can lean on it.
Where can I find a free AC507 Unit 10 sample paper?
This page holds a full AC507 Unit 10 planning recommendation memo for two founders of a composite surgical-instrument startup, recommending a C corporation, with the small business stock exclusion, priced contingencies and APA 7 references.
Why issue founder shares now rather than at the first funding round?
The five-year holding period for the small business stock exclusion starts when the shares are issued. Issuing them now, at a low value, lets nearly all of the company's growth fall inside the exclusion.