Page 1 of 3
Tax Rules for Four Entities: C Corp., S Corp., Proprietorship, Partnership
Basic problem of a business with net income (taxable income) of $1,000,000 in its first year,
after deducting all expenses including owner salary.
Owner's salary or guaranteed payment is $100,000,
(except with partnership version in which she is a 50% owner and gets 50% of the salary paid - $50,000).
There is no state income tax.
Business owner is single and claims the standard deduction.
See paragraph above Example 29 on page 13-21 of textbook.
C corporation with taxable income of $1,000,000 in its first year. (Textbook Page 13-13, 15)
The C corporation pays its federal income tax and distributes all after-tax income to the only shareholder.
How much total federal income tax is paid on the corporate net income
of $1,000,000 (at corporate level and individual level)?
First, at the individual level, consider only the tax paid by the owner on the dividend (not on her salary).
Focus is on the impact of double taxation of corporate earnings.
Then, how much federal income tax is paid by owner considering the dividend income
and her salary from the corporation?
Assume the corporation is an S corporation that pays no dividend. (Page 13-14)
How much corporate income tax is paid?
How much individual income tax is paid by the only shareholder?
If she takes a dividend, does that increase her income?
She paid $200,000 for her S corporation stock at the start of the first year.
What is her basis in the stock at the end of the first year? Exhibit 14-5, page 14-18.
Would receiving a dividend change her basis?
Assume the business is a properietorship. (Page 13-12)
What is her self-employment income and her self-employment tax?
What is her individual federal income tax?
Assume the business is a partnership. (Page 13-12)
She is a 50% partner and received 50% of the salary (her guaranteed payment was $50,000)
How much income does she report on her form 1040 from the partnership?
How does she compute self-employment income, and self-employment tax?
She paid $300,000 for her partnership interest at the beginning of the year.
What is her basis in the partnership at the end of the year, etc.? Exhibit 14-2, page 14-8.
How much FICA tax is withheld from the owner's salary?
How much FICA tax is paid by the owner?