Jim and Ginny have a very profitable corporation in which they are both corporat

Question

Jim and Ginny have a very profitable corporation in which they are both corporate officers. The corporation has never paid dividends. The corporate business is known by the public as The Tasty Taco Company. They have 12 company-owned restaurants and 20 franchisees. Jim works with the franchise owners and Ginny does the books for the 12 company locations and she helps Jim with managing the operations. Jim is paid a salary of $5,000,000 per year and Ginny is paid $6,000,000 per year since she also does the accounting.

Ginny owns 42% of the common stock outstanding and Jim owns 48%. Ginny's mother owns the remaining 10% of the stock.

The balance sheet has $14,000,000 in retained earnings. Since it is so profitable, they "voted" to give bonuses to the two of them of $1,000,000 each and give Ginny's mom a $100,000 bonus.

In addition, Jim wants to have the corporation donate his corporate car to his daughter to drive to college and have the corporation buy another car for him to drive. Since that sounded like a good idea, Ginny decided to have the corporations donate her corporate car to her son who is just now turning 16.

Discuss the tax issues, if any, that can result from the plans described above.

Explanation / Answer

Solution-

Jimmy and Ginny

There are a number of tax issues that will arise from the distribution of bonuses to the three shareholders of Tasty Taco Company. Jim and Ginny will have to pay their normal FICA taxes on their annual salary of $5 million and $6 million respectively in the amount totaling 6.2% (Percent) for social security and 1.45% (Percent) for Medicare. For these amounts Tasty Taco Company will have to top with the same percentages of 6.2% for social security and 1.45% (Percent) for Medicare bringing the total to 15% (Percent) paid for FICA taxes. In addition, 0.9% (Percent) Medicare taxes will be withhold for amounts totaling more than wages in excess of $200,000. In addition to FICA taxes, the individuals will have to pay their respective income taxes for as per to their respective marginal tax rates.

On the other hand, Jim and Ginny as well as Ginny’s mother will be spared from paying FICA taxes on the bonuses they receive. Since the company has not been paying dividends, the bonuses the trio will receive will have to be taxed as ordinary income. Since the amount of bonuses the trio receives is less than 1 million for each, they will have to pay taxes at a flat rate worth 25% (Percent) of their respective amounts. As a result, Jim and Ginny will have to $250,000 as tax for their respective bonuses while Ginny’s Mother will have to pay $25,000 as tax on her $100,000 bonus.

For the car gifts that Jim and Ginny will extend to their daughter and mother respectively, they will be allowed to exempt a total of $14,000while calculating their taxable income. On the side of the company, it will be allowed to deduct the amount it will use to replace their gifted cars for Jim and Ginny.

Reference

IRS, Topic 751- social security and Medicare Withholding Rates, IRS Publication on supplementary wages

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