30. LO.1, 2 In the current year, Azure Company has $350,000 of net operating inc

Question

30. LO.1, 2 In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sourcesand is in the 39.6% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations.

a. Azure is a C corporation and pays no dividends or salary to Sasha.

b. Azure is a C corporation and distributes $75,000 of dividends to Sasha.

c. Azure is a C corporation and pays $75,000 of salary to Sasha.

d. Azure is a sole proprietorship, and Sasha withdraws $0.

e. Azure is a sole proprietorship, and Sasha withdraws $75,000.

Explanation / Answer

Income tax cosequences to Azure company and Sasha

A.Azure is a C Corporation and pays no Dividend or Salary to Sasha

During the year Sasha has not received any dividend or salary from Azure,so she is not taxed on any corporations income.

Azure company as a c corporation has a taxable income of $3,50,000 and tax rate to be applied after reducing treshold limit from taxable income under income tax rules to compute corporate tax.

B.Azure is a C Corporation and Distributes $75000 of Dividends to Sasha

Dividends will be paid after paying taxes,so there is no tax consequences arises to Azure company as a C corporation.

Sasha liable to pay tax on dividend received during the year.

C.Azure is a C Corporation and pays $75000 of Salary to Sasha

Taxable income of Azure will be reduced by $75000 and balance amount is taxable i.e =350000-75000 = $275000

Sasha is liable to pay incometax on salary received.Tax payable = $75000*39.6% = $29700

D.Azure is a Sole Proprietorship and Sasha withdraws $0

Income from sole proprietorship is taxable in the hands of Sasha.

So taxable income of Sasha is Profits of Azure.

Tax payable = $350000*39.6%=$138600

E.Azure is a sole proprietorship and Sasha withdraws $75000

Even Sasha withdraws,she liable to pay tax on total profit of Azure.

So tax payable =$350000*39.6% =$138600

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