For the current year, Maple Corporation, a C corporation, reports taxable income of $285,000 before paying salary
Question:
For the current year, Maple Corporation, a C corporation, reports taxable income of $285,000 before paying salary to its sole shareholder, Diane. Diane’s marginal tax rate on ordinary income is 35.9 percent (including the additional Medicare tax) and 18.8 percent on dividend income (including the 3.8% net investment income tax). If Maple pays Diane a salary of $155,000 but the IRS determines that Diane’s salary in excess of $85,000 is unreasonable compensation, what is the amount of the overall tax (corporate level + shareholder level) on Maple’s $285,000 pre-salary income? Assume Maple’s tax rate is 35 percent and it distributes all after-tax earnings to Diane.
*Note: I've already tried this:
Calculation of overall tax(combined for corporation &shareholder) computed as follows: | ||||||||||||||||
Particulars | with $ 145000 salary | description | ||||||||||||||
1) | Taxable income before salary | 365000 | ||||||||||||||
2) | salary | 145000 | ||||||||||||||
3) | Taxable income | 220000 | ||||||||||||||
4) | entity tax | 78980 | (3)*35.9% | |||||||||||||
5) | after tax entity earnings | 141020 | (3)-(4) | |||||||||||||
6) | Diane's tax on dividends | 26512 | (5)*18.8% | |||||||||||||
7) | Diane's tax on salary | 50750 | (2)*35% | |||||||||||||
overall tax = (4) + (6) +(7) =78980+26512+50750=$ 156242 | ||||||||||||||||
I've also tried using 35% and 15%, rather than 35.9% and 18.8%. The online submission site rejects either answer and regards it as "incorrect." |
Principles of Taxation for Business and Investment Planning 2019 Edition
ISBN: 9781260161472
22nd edition
Authors: Sally Jones, Shelley C. Rhoades-Catanach, Sandra R Callaghan