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

 

  

Transcribed Image Text:

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 products 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 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. Elaine is assuming a reasonable compensation amount of $50,000. • As a C Corporation, the business will dividend out all earnings 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, and Elaine wants to grow her business to take advantage of the expanding market. Using 2019 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. Entity Choice SoleProp $39,902 S Corp $31,761 C Corp $45,613 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Total Taxes SoleProp S Corp C Corp Business Income 150,000 150,000 150,000 Тax Туpes Reasonable Compensation 150,000 50,000 50,000 Corporate-level tax 50% Self-Emply Tax 9,618 3,532 3,532 Owner-level dividends tax Taxable Income 140,382 96,468 96,468 Employment Tax QBI 20% 20% Owner-level income tax TI net of QBI 109,403 77,174 96,468 Corporate Tax Rate 21% Corporate-level tax 20,258 Personal Taxable Income 110,382 127,174 50,000 Indv Marginal Rate 24% 24% 22% Owner-level income tax 20,666 24,696 6,859 Qualified Dividends Income 76,209 Indv Div Rate 15% Owner-level dividends tax 11,431 Employment Tax 19,236 7,065 7,065 Total Tax 39,902 31,761 45,613 Overall tax rate 26.60% 21.17% 30.41% * + a blea U Required: 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? Complete this question by entering your answers in the tabs below. Req a Req b Req c Req d Req e How much total tax does Elaine pay currently as a sole proprietorship? Elaine's Total tax < Req a Req b > 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 products 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 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. Elaine is assuming a reasonable compensation amount of $50,000. • As a C Corporation, the business will dividend out all earnings 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, and Elaine wants to grow her business to take advantage of the expanding market. Using 2019 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. Entity Choice SoleProp $39,902 S Corp $31,761 C Corp $45,613 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Total Taxes SoleProp S Corp C Corp Business Income 150,000 150,000 150,000 Тax Туpes Reasonable Compensation 150,000 50,000 50,000 Corporate-level tax 50% Self-Emply Tax 9,618 3,532 3,532 Owner-level dividends tax Taxable Income 140,382 96,468 96,468 Employment Tax QBI 20% 20% Owner-level income tax TI net of QBI 109,403 77,174 96,468 Corporate Tax Rate 21% Corporate-level tax 20,258 Personal Taxable Income 110,382 127,174 50,000 Indv Marginal Rate 24% 24% 22% Owner-level income tax 20,666 24,696 6,859 Qualified Dividends Income 76,209 Indv Div Rate 15% Owner-level dividends tax 11,431 Employment Tax 19,236 7,065 7,065 Total Tax 39,902 31,761 45,613 Overall tax rate 26.60% 21.17% 30.41% * + a blea U Required: 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? Complete this question by entering your answers in the tabs below. Req a Req b Req c Req d Req e How much total tax does Elaine pay currently as a sole proprietorship? Elaine's Total tax < Req a Req b >

Answer rating: 100% (QA)

ATax paid by Elaine as a sole proprietorship 39902This is the amount ... View the full answer