December 3, 2010
1. A. Since corporations are taxable entities separate from their
owners, the total taxable income if Morris is a corporation is
Morris would then have an
income tax liability of $16,250($65,000x 25%).
Drew would have a taxable income of $115,000($85,000+
$30,000). Since he is single, he would have an income tax
liability of $48,981.25($115,000x28%=$32,000+$16,781.25).
B. Since S corporations are conduit entities, they do not pay tax.
Morris’s taxable income is still equal to $65,000 but they have no
tax. Drew however, is still taxed on the $115,000 salary, so his
total income tax liability is still $48,981.25
2. A If Morris is being regarded as a corporation, then including
dividends, taxable income is
$25,000) So Morris have an income tax liability of
$30,600($90,000x34%) Dividends are no not deductible business
expenses since they are paid out to the shareholders, as Morris
sole owner, Drew’s taxed on receipt of dividends. Therefore his