The Richer Company reports taxable income of $400,000. Tom owns 100-percent of Richer. Compute the tax effects
Question:
The Richer Company reports taxable income of $400,000. Tom owns 100-percent of Richer. Compute the tax effects on the entity (if any) and the owner in each of the following cases.
Assumptions:
• Prior to 2018, the corporate tax rate was 34%.
• The Richer Corporation distributes all their after-tax income to Tom as a dividend.
• Tom’s marginal tax rate on ordinary income is 33% and the tax rate on qualified dividends is 15%.
• Ignore the standard deduction, personal exemption, and self-employment taxes.
• In the partnership cases, assume that Tom owns 50% of the partnership.
• Ignore the income limits to compute the QBI deduction. Just use 20% of the QBI to compute the QBI deduction.
Required:
a) Using the 2017 corporate tax rate (34%), compute the tax consequences if Richer Company is: (1) a corporation, (2) a sole proprietorship, (3) a partnership, and (4) an S corporation. Remember, the QBI deduction did not exist in 2017.
b) Assume that Congress did NOT enact the QBI deduction. Compute the total tax consequences for 2018 if Richer is: (1) a corporation, (2) a sole proprietorship, (3) a partnership, and (4) an S corporation.
c) In fact, Congress did enact the QBI deduction effective for tax years beginning in 2018. Compute the tax consequences for 2018 if Richer is: (1) a corporation, (2) a sole proprietorship, (3) a partnership, and (4) an S corporation.
d) Briefly comment on your results.
Investments
ISBN: 978-0071338875
8th Canadian Edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter