Kate Brown has operated her small repair shop as a sole proprietorship for several years, but projected changes in her business’s income have led her to consider incorporating. Kate is married and has two children. Her family’s only income, her annual salary of $60,000, comes from operating the business. (The business actually earns more than $60,000, but Kate reinvests the additional earnings in the business.) She itemizes deductions, and she is able to deduct $19,500. These deductions, combined with her four personal exemptions for 4 × $3,950 = $15,800, give her a personal taxable income of $24,700 = $60,000 – $19,500 – $15,800. Of course, her actual taxable income, if she does not incorporate, would be higher by the amount of reinvested income. Kate estimates that her business earnings before salary and taxes for the period 2016 to 2018 will be as follows:
Year Salary and Taxes
2016 .......... $ 90,000
2017 .......... 120,000
2018 .......... 150,000
a. What would Brown’s total taxes (corporate plus personal) be in each year under?
(1) A corporation? (2016 tax $7,297.50)
(2) A proprietorship? (2016 tax $7,297.50)
b. Should Brown incorporate? Discuss.