solutions_to_assignments_Solutions

# solutions_to_assignments_Solutions - 40 Drew is the sole...

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Unformatted text preview: 40. Drew is the sole owner of Morris, Inc., a corporation. Morriss net income for the current year is \$150,000 before considering Drews \$85,000 salary. Assume Drew is single and has income from other sources that is \$30,000 more than his allowable deductions. What is the total income tax liability if Morris is: a. A corporation Drew can be an employee of the corporation, which is a separate taxable entity. He will be taxed on the salary he receives and his taxable income will be \$115,000 (\$85,000 + \$30,000). The corporation deducts his salary in calculating its taxable income of \$65,000 (\$150,000 - \$85,000). The total income tax liability if Morris is organized as a corporation is \$37,428: Corporate tax - \$ 7,500.00 + [25% x (\$ 65,000 - \$50,000)] \$ 11,250 Drew's tax - \$16,056.25 + [28% x (\$115,000 - \$78,850)] 26,178 Total income tax liability \$ 37,428 b. An S corporation An S corporation is a conduit entity. Drew can be an employee of the corporation and is taxed on the salary he receives. As the sole owner, Drew will also include the S corporation's \$65,000 (\$150,000 - \$85,000) income in his taxable income. Drew's taxable income is \$180,000 (\$65,000 + \$85,000 + \$30,000) and he will pay a tax of \$45,151 if Morris is organized as an S corporation: Drew's tax - \$40,052.25 + [33% x (\$180,000 - \$164,550)] \$ 45,151 41. Return to the facts of problem 40. Assume that late in the year, Drew needs extra cash to pay off gambling debts and has the corporation declare a \$25,000 dividend to provide the cash. What is the effect of the dividend payment on the total income tax liability if Morris is a. A corporation The dividend will be taxable to Drew and cannot be deducted by Morris. The dividend, while subject to double taxation, is taxed at the long-term capital gains rate. Drew's taxable income increases to \$140,000 and the total income tax liability increases to \$41,178: Corporate tax - \$ 7,500.00 + [25% x (\$65,000 - \$50,000)] \$ 11,250 Drew's tax - Ordinary income - \$115,000 (from problem #40) \$ 26,178 Dividend income - \$ 25,000 x 15% 3,750 29,928 Total income tax liability \$ 41,178 b. An S corporation The dividend paid to Drew is not taxable (return of capital investment) and cannot be deducted by Morris. There is no effect on the total tax liability; it remains \$45,151. 42. In January of the current year, Josh purchases all the stock of Ballpark Corporation for \$100,000. Ballpark's taxable income for the current year is \$200,000, and it pays \$61,250 in income tax. None of the earnings is distributed as dividends. Josh believes that if he sells his stock two years later for \$238,750, he will avoid double taxation. Write a memo to Josh explaining why he is not avoiding double taxation just because he receives no dividends....
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solutions_to_assignments_Solutions - 40 Drew is the sole...

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