Lucia, a single taxpayer, operates a florist business. 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 $20,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annually $50,000 of taxable income before considering a deductible salary expense.

Which business form(s) can best achieve Lucia'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 Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions.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, Lucia is in the 25% individual tax bracket for ordinary income, and Lucia 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.

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The computation of tax is carried out as given below Individual C Corpor... View the full answer