C 4- 58 Comprehensive Problem

Several years ago, Brian formed Sigma Corporation, a retail company ineligible for the U.S. production activities deduction. Sigma uses the accural method of accounting. In 2017, the corporation reported the following items:

Gross profit	290,000
Long-term capital gain	20,000
Tax-exempt interest received	7000
Salary paid to Brian	80,000
Payroll tax on Brian's salary (Sigms's share)	6,120
Depreciation	25,000 ($21,000 for E&P purposes)
Other operating expenses	89,000
Dividend distribution to Brian	60,000

In addition to owning 100% of Sigma's stock, Brian manages Sigma's business and earns the $80,000 salary listed above. This salary is an ordinary and necessary business expense of the corporation and is reasonable in amount. The payroll tax on Brian's $80,000 salary is $12,240, $6,120 of which Sigma pays and deducts, and the other $6,120 of which Brian pays through Social Security withholding. Brian is signle with no dependents and claims the standard deduction.

a. Calculate Signma's and Brian's 2017 taxable income and total tax liability, as well as their combined tax liability. Also, calcuate the corporations' current E&P after the dividend distribution.

b. Assume instead that Brian operates Sigma as a\ sole proprietorship. in the current year, the business reports the same operating results as above, and Brian withdraws $140,000 in lieu of the salary and dividend. Brian's self-employement tax is $20,486. Compute Brian's total tax liability for 2017

c. Assume a C corporation such as in Part a distributes all of its after-tax earnings. Compare the tax treatement of long-term capital gains, tax-exempt interest, and operating profits if earned by a C corporation with the tax treatment of these items if earned by a sole proprietorship.