Question
Katherine,a single taxpayer, operates advance studio. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation
Katherine,a single taxpayer, operates advance studio. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $18,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annual $47,000of taxable income before considering a deductible salary expense.
Requirement Which business? form(s) can best achieve Katherine's ?goals? Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions. Assume that the C corporation is in the 15?% corporate tax? bracket, Katherine is in the 25?% individual tax bracket for ordinary? income, and Katherine is taxed at 15?%
on dividend income. When considering either corporate? option, perform the analysis first by treating any withdrawals as deductible salary payments of the corporation. Then do the analysis by treating them as nondeductible dividends or distributions. Ignore employment taxes.
Complete the table to determine the amount of total tax for each business form. Start with the entity? level, then determine Katherine's tax and finally the total tax.?
For simplification? purposes, please use a 25?% tax rate to calculate the tax on Katherine's
ordinary? income
Sole | C Corporation | C Corporation | S Corporation | S Corporation | ||||||
Proprietorship | with Salary | with Dividend | with Salary | with Distribution | ||||||
Entity Level: | ||||||||||
Income before salary | ||||||||||
Salary deduction | ||||||||||
Taxable income | ||||||||||
Entity level tax |
Step by Step Solution
3.39 Rating (155 Votes )
There are 3 Steps involved in it
Step: 1
Sole C Corporation C Corporation S Corporation S Corporation Proprietorsh...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started