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DanielleCPA, Certified Public Accountant (CPA)
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Benton Company (BC) has one owner, who is in the 35% Federal

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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.

Hi and welcome to Just Answer! I'm happy to help with your tax questions. Feel free to interject at any time if you need clarification.

 

 

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"

50,000 *15% = 7,500

25,000 * 25% = 6,250

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.

 

Customer: replied 4 years ago.

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.
Customer: replied 4 years ago.

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.

 

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%.

DanielleCPA and other Tax Specialists are ready to help you
Customer: replied 4 years ago.

I got it now. I found the Corporate Income Tax Rates and can clearly see what you explained.

 

Thanks

 

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.

Customer: replied 4 years ago.

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.
Customer: replied 4 years ago.

Already accepted answer and paid a tip!

 

Thanks

Thank you

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