32. LO.1, 4, 8 Benton Company (BC) has one owner, who is in the 33% Federal inco
ID: 2492336 • Letter: 3
Question
32. LO.1, 4, 8 Benton Company (BC) has one owner, who is in the 33% Federal income tax bracket. BC’s gross income is $395,000, and its ordinary trade or business deductions are $245,000. Compute the Federal income tax liability on BC’s income for the current year under the following assumptions:
a.BC is operated as a proprietorship, and the owner withdraws $100,000 for personal use.
b.BC is operated as a corporation, pays out $100,000 as salary, and pays no dividends to its shareholder.
c.BC is operated as a corporation and pays out no salary or dividends to its shareholder.
d.BC is operated as a corporation, pays out $100,000 as salary to its shareholder, and pays out the remainder of its earnings as dividends.
e.Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship. Robert is thinking about incorporating the business for next year and asks your advice. He expects about the same amounts of income and expenses and plans to take $100,000 per year out of the company whether he incorporates or not. Write a letter to Robert [based on your analysis in (a) and (b)] containing your recommendations.
Explanation / Answer
Answer e
Date: 05/29/2016
To,
Mr. Robert Benton,
1121, Monroe Street,
Ironton,
OH 45638 .
Dear Sir,
I have understand your need properly. That you want to save maximum tax with withdrwal of $ 100000 per year. I calculated the figure as per your requirement and calculation of tax liability is also attched herewith.
As per calculation, TAx liability in sole propertiership is $ 49500 where as gross tax liability is $ 40,500. So, My advice is form a corporation and save $ 9000 tax per year.
Kindly acknowledge the same.
Your truly.
Answer a BC is operated as proprietorship, and the owner withdraw $ 100000 for personal use. Gross Income 395000 Business deductions 245000 Net Taxable Income 150000 Tax liability @ 33% 49500 Withdrwal of $ 100000 for personal use does not affect the income tax liability. Answer b BC is operated as corporation and pay out $ 100000 as salary and pay no dividend to its shareholder. Gross Income 395000 Business deductions 245000 Salary 100000 Net Taxable Income 50000 Tax liability @ 15% 7500 * 15% is corporation tax Salary taxable its share holder as their Income Salary 100000 Tax liability @ 33% 33000 Total Tax liability 40500 Answer c BC is operated as corporation and pay out no salary or dividend to its shareholder. Gross Income 395000 Business deductions 245000 Net Taxable Income 150000 Corporation Tax Up to 100000 22250 100000 to 150000 19500 Total Tax liability 41750 Answer d BC is operated as corporation and pay out $ 100000 as salary to its share holder and pay out the reminder of its earning as dividends. Gross Income 395000 Business deductions 245000 Salary 100000 Net Taxable Income 50000 tax liability in the hand of share holder Salary 100000 Dividend 50000 Total 150000 Tax @ 33% 49500Related Questions
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