Benton Company (BC) has one owner, who is in the 35% Federal income tax bracket. BC’s gross income is $295,000, and its ordinary trade or business deductions are $135,000. Compute the tax liability on BC’s income for 2011 under the following assumptions: a. BC is operated as a proprietorship, and the owner withdraws $70,000 for personal use. b. BC is operated as a corporation, pays out $70,000 as salary, and pays no dividends to its shareholder. c. BC is operated as a corporation, pays out no salary or dividends to its shareholder. d. BC is operated as a corporation, pays out $70,000 as salary to its shareholder, and pays out the remainder of its earnings as dividends.
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Net income is $160,000 (295,000-135,000).
A) I am making two assumptions here. 1) I am excluding self-employment tax (if I should include, let me know). 2) I am assuming the owner is already in the 35% bracket with his other income, so all of the business income is taxed at 35%. That being said, 35% tax on $160,000 is $56,000. All tax is paid at the owner's personal level - so no corporate tax.
B ) Net income here would be $90,000. Tax would be calculated as follows based on corporate tax brackets:
50,000 *15% = 7,500
25,000 * 25% = 6,250
15,000 * 34% = 5,100
So, total corporate tax would be $18,850.
The owner would also need to pay tax on his $70,000 salary at 35%, so $24,500.
C) Net income would be $160,000. Tax would be calculated as follows based on corporate tax brackets"
25,000 * 34% = 8,500
60,000 * 39% = 23,400
Total corporate tax = $45,650
D) Corporate tax would be $18,850 (same as in B).
The owner would still owe $24,500 in tax on his 70,000 salary (calculated in B)
The dividends would be taxed at qualified dividends rates, currently 15% - so he would owe an additional $13,500 (90,000 dividend * 15%) on the individual level.
I agree with #a... I have the same answers
#b - I got the same for owner tax
b. BC is operated as a corporation, pays out $70,000 as salary, and pays no dividends to its shareholder.
Don't we have to ignore: PLEASE CONFIRM
any corporate taxes
any state income tax on either the corporation or the individual.
Payroll taxes savings
#C - Robert will pay no personal income tax because he took no salary or dividends from the corporation. Please confirm.
If you have to ignore the items listed, your answer to C would be correct.
Do you mind explaining this to me? Why did you split the income and used 3 different Tax Rates?
Corporate tax rates, just like individual tax rates, are tiered. Tax rates only apply to income that falls within a particular tax rate. E.g. if you are in the 25% tax bracket, all of your income is not taxed at the 25% rate, only the portion that exceeds the bottom of that tax bracket.
Corporate tax brackets are as follows:
$0-$50,000 - 15%
$50,000-75,000 - 25%
$75,000 - $100,000 - 34%
$100,000 - 335,000 - 39%
So, because only the portion of income that falls within a particular tax bracket is taxed at a particular rate, we need to break down to calculate. The first $50K is taxed at 15%, the next 25,000 at 25%, and the remaining $15K is taxed at 34%.
Years of Experience in Business & Personal Taxes
I got it now. I found the Corporate Income Tax Rates and can clearly see what you explained.
I am still reviewing this problem and your solutions so perhaps I am not ready to accept the answer.
Thanks for your understanding.
I understand you want to make sure you get the right answer. Take your time.
Thanks for being so patience with me and answering all my questions.
I just finished reviewing this problem throughly and all your answers which were very helpful. Thanks to your help it was easy for me to understand it.
You're welcome! I was glad to help.
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