Blue-Eyed Beauty Supply is the talk of the town. When Elaine started her business, she had...

   

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Blue-Eyed Beauty Supply is the talk of the town. When Elaine started her business, she had no idea it would evolve to be the number one supplier of cosmetology supply in the region. While her business has been successfully operating as a sole proprietorship for many years, her legal counsel has urged her to form a separate legal entity for a variety of nontax reasons. Elaine has come to you for advice on the tax implications of her decision. You have loaded her 2023 tax data, based upon provided assumptions, into a model based on the following facts: Elaine is single and her sole source of income is from her business activities. It is expected that her business meets the definition of a trade or business for Qualified Business Income deduction purposes. Given her responsibilities, Elaine is assuming a reasonable compensation amount of $50,000. As a C Corporation, the business will dividend out all earnings after taxes are paid to Elaine. Elaine wants to minimize her overall tax burden while protecting her assets. Blue Eyed Beauty Supply is in an industry enjoying a period of growth and investment. Elaine wants to grow the business to take advantage of the expanding market. Using 2023 income tax rules, you have created the following Tableau visualization for the current tax year to help Elaine make a decision. Mouse-over the graphs to reveal specific amounts for use in answering the following questions. HINT: If necessary, be sure to change the Reasonable Compensation radio button to $50,000. a. How much total tax does Elaine pay currently as a sole proprietorship? b. How much less Employment tax will Elaine pay if she incorporates and makes a timely S election as opposed to a sole proprietorship? c. How much of the business income will be issued to Elaine as a dividend under the C Corporation scenario? d. What is the Corporate-level tax due if she does not make an S Corporation election? e. Which option provides Elaine with the most amount of tax savings? Blue Eyed Beauty Supply Sch C 18,398 15,300 21,901 S Corp C Corp 15,300 20,444 20,767 10,265 4,118 Description Corporate-level tax Reasonable Compensation 50,000 Owner-level Income Tax 55,000 Owner-level Dividends Tax 60,000 Employment Tax 65,000 70,000 75,000 Total Tax Sch C 40,299 Sch C Overall tax rate 26.00% S Corp 36,067 C Corp 50,126 S Corp 23.27% C Corp 32.34% Total Business Income Sch C/Reasonable Comp 155,000 50% Self-Emply Tax 10,950 Sch C 155,000 S Corp 155,000 50,000 7,650 C Corp 155,000 50,000 7,650 S-Corp K-1 0 97,350 0 Adjusted Gross Income 144,050 147,350 126,907 Standard Deduction 13,850 13,850 13,850 QBI 26,040 19,470 0 Taxable Income 104,160 114,030 113,057 Ordinary Taxable Income 104,160 114,030 50,000 Qualified Dividend Income 0 0 76,907 Blue-Eyed Beauty Supply is the talk of the town. When Elaine started her business, she had no idea it would evolve to be the number one supplier of cosmetology supply in the region. While her business has been successfully operating as a sole proprietorship for many years, her legal counsel has urged her to form a separate legal entity for a variety of nontax reasons. Elaine has come to you for advice on the tax implications of her decision. You have loaded her 2023 tax data, based upon provided assumptions, into a model based on the following facts: Elaine is single and her sole source of income is from her business activities. It is expected that her business meets the definition of a trade or business for Qualified Business Income deduction purposes. Given her responsibilities, Elaine is assuming a reasonable compensation amount of $50,000. As a C Corporation, the business will dividend out all earnings after taxes are paid to Elaine. Elaine wants to minimize her overall tax burden while protecting her assets. Blue Eyed Beauty Supply is in an industry enjoying a period of growth and investment. Elaine wants to grow the business to take advantage of the expanding market. Using 2023 income tax rules, you have created the following Tableau visualization for the current tax year to help Elaine make a decision. Mouse-over the graphs to reveal specific amounts for use in answering the following questions. HINT: If necessary, be sure to change the Reasonable Compensation radio button to $50,000. a. How much total tax does Elaine pay currently as a sole proprietorship? b. How much less Employment tax will Elaine pay if she incorporates and makes a timely S election as opposed to a sole proprietorship? c. How much of the business income will be issued to Elaine as a dividend under the C Corporation scenario? d. What is the Corporate-level tax due if she does not make an S Corporation election? e. Which option provides Elaine with the most amount of tax savings? Blue Eyed Beauty Supply Sch C 18,398 15,300 21,901 S Corp C Corp 15,300 20,444 20,767 10,265 4,118 Description Corporate-level tax Reasonable Compensation 50,000 Owner-level Income Tax 55,000 Owner-level Dividends Tax 60,000 Employment Tax 65,000 70,000 75,000 Total Tax Sch C 40,299 Sch C Overall tax rate 26.00% S Corp 36,067 C Corp 50,126 S Corp 23.27% C Corp 32.34% Total Business Income Sch C/Reasonable Comp 155,000 50% Self-Emply Tax 10,950 Sch C 155,000 S Corp 155,000 50,000 7,650 C Corp 155,000 50,000 7,650 S-Corp K-1 0 97,350 0 Adjusted Gross Income 144,050 147,350 126,907 Standard Deduction 13,850 13,850 13,850 QBI 26,040 19,470 0 Taxable Income 104,160 114,030 113,057 Ordinary Taxable Income 104,160 114,030 50,000 Qualified Dividend Income 0 0 76,907