They have other income that offsets their allowable

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they have other income that offsets their allowable deductions, they will each pay a tax of $10,856 {$5,081.25 + [25% x ($60,000 - $36,900)]} on their $60,000 salaries. #39
b. What could the shareholders do to lower the corporate income tax liability in the future? The purpose of the 35% flat tax rate is to force the owner- employees of PSC’s to take most, if not all, of the corporate income out of the entity in the form of salary. Because the marginal tax rate is 28% for a married taxpayer who files a joint tax return with a taxable income of less than $226,850 ($186,350 filing single, $206,600 head of household) the three shareholders should increase their salary levels up to the maximum income level in the 28% tax bracket. This strategy mitigates the impact of the flat 35% corporate tax rate. #39
Example: Assume that each owner is single and receives a salary of $100,000 (an increase of $40,000 per owner) reducing corporate taxable income to $180,000 ($300,000 - $120,000). The total tax liability is $126,528: Corporate tax: $180,000 x 35% $ 63,000 Owner's tax: {$18,193.75 + [28% x ($100,000 - $89,350)] x 3} 63,528 Total tax liability $126,528 The current total tax liability is $137,568 [$105,000 + ($10,856 x 3)]. Increasing the salaries paid to the owners saves $11,040 ($137,568 - $126,528) in taxes. #39
Antonio and Michaela are equal partners in A&M Booking Services. Antonio manages the business and receives $40,000 per year for his management services. He and Michaela each withdraw $30,000 in cash during the current year. A&M’s ordinary income is $80,000 before considering any payments to the partners. How much income do Michaela and Antonio have from A&M during the current year? #43
A partnership is a conduit entity. The partners cannot be employees of the partnership and any salaries they receive cannot be deducted by the partnership. Partners are not taxed on withdrawals; they are returns of capital investment. The $40,000 Antonio receives for management services is a guaranteed payment because it is paid without regard to the profit of the business. Antonio must include the guaranteed payment in his income and the partnership can deduct the payment. The partnership ordinary income is $40,000 ($80,000 - $40,000), which is shared equally by Antonio and Michalea. Antonio’s income is $60,000 [$40,000 + ($40,000 x 50%)] and Michalea’s income is $20,000 ($40,000 x 50%): #43
Partnership income: $80,000 - $40,000 = $40,000 Antonio’s income: Guaranteed payment $40,000 Share of income - $40,000 x 50% 20,000 $60,000 Michaela’s income: Share of income - $40,000 x 50% $20,000 #43
April 28 th , 2016 CONCEPTS IN FEDERAL TAXATION CHAPTER 14: CHOICE OF BUSINESS ENTITY: OPERATIONS AND DISTRIBUTIONS
EXTRA PROBLEMS CHAPTER 14
Wrigley Juice has the following income, expense, and loss items for the current year: Sales $850,000 Tax-exempt interest 40,000 Long-term capital gain 85,000 Short-term capital loss 35,000 Passive activity loss 20,000 Cost of goods sold 480,000 Depreciation 40,000 Section 179 expense 50,000 Other operating expenses 200,000 Net operating loss (from preceding year) 24,000 #15
Assume that Wrigley Juice is a partnership owned equally by Vinnie and Chandra. Explain the effect of Wrigley’s results on Vinnie’s and Chandra’s tax returns.

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