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Brenda Guy
Brenda Guy, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 151
Experience:  20 years of working with income and estate tax issues for families and businesses.
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LO.1,4 Benton Company (BC) has one owner, who is in the 35%

Customer Question

LO.1,4 Benton Company (BC) has one owner, who is in the 35% Federal income tax bracket. BC’s gross income is $320,000, and its ordinary trade or business deductions are $175,000. Compute the tax liability on BC’s income for 2009 under the following assumptions: a. BC is operated as a proprietorship, and the owner withdraws $90,000 for personal use. b. BC is operated as a corporation, pays out $90,000 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 $90,000 as salary to its shareholder, and pays out the remainder of its earnings as dividends. e. Assume Robert Benton ofXXXXX Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship In 2009. Robert is thinking about incorporating the business in 2010 and asks your advice. He expects about the same amount of income and expenses in 2010 and plan to take $90,000 per year out of the company whether he incorporates or not. Write a letter to Robert [based on your analysis in (a) and (b) above] containing your recommendations.
Submitted: 6 years ago.
Category: Tax
Expert:  Brenda Guy replied 6 years ago.
Chat Conversation Started
Brenda Guy :

Robert should incorporate the business. Additionally he should make an S election for the corporation. There are some tax benefits to this structure that are in addition to the legal benefits related to liability. The biggest tax benefit is the difference in self-employment tax.

Brenda Guy :

Under the sole proprietorship option the SE tax is 15.3% of the first $106,800 and 2.9% of the remaining income for a total of $18,318.20.

Brenda Guy :

Under the S corp option the SE tax is $13,770 1/2 of which is paid by the corporation.

Brenda Guy :

The income is reported on different schedules. But will result in the same regular tax under both scenarios. The biggest difference is the SE tax which is $4,578 less under the corp structure.

Brenda Guy :

The only other consideration is that you are in Texas. Texas does not tax individuals. I believe they do have some kind of business tax on corporations.

Customer :

ok

Customer :

Hi Brenda. The answers I'm looking for a for a, b, c d, and e. Which one are you aswering here?

Brenda Guy :

I am answering e. a,b, c, and d do not consider the S corporation. This is a structure that I use often. Your other questions seem to refer to comparison to a regular corporation. That is never going to be a good answer for you in the long term as it will cost you much more with a regular corp as you will be double taxed. I think the only 2 options are stay a sole proprietorship or incorporate with an S election.

Brenda Guy :

Another thought - you said Robert is in Ohio in the text and list Texas as the state below. Ohio tax laws will the the tax laws that are applicable, not Texas.

Customer :

This is not anything personal. This is a school assignment.

Customer :

Are you there?

Brenda Guy :

You should do you own homework