Question

Scenario 1: Leo is the sole owner of Leo Construction, a proprietorship whose profit was $500,000 for 2017, he had income of $10,000 from interest generated by his personal bank savings

Scenario 2: Leo and four nephews have equal ownership rights in a partnership called Leo and Nephews Construction Company. The company had a profit of $500,000 for 2017, and each of the five partners received $2,000 in interest income.

Scenario 3: Leo and his four nephews decide to incorporate their company as Leo Associates, Inc. In 2017, the corporation earnings before income taxes was $500,000 and all after-tax profit was distributed as dividends to the five shareholders, each one receiving the same amount. Also each of the five stakeholders received $2,000 in interest income.

(1) For the above three scenarios, assuming Leo and his four nephews are all married and filing jointly with no dependent children, and there is no other deductions. For each scenario: (a) How much federal income tax each individual should pay? (b) How much income tax the IRS would receive in total?

Answer 1

In 2017, the applicable tax rates for filing jointly were as per the table provided below: (Source of both tables is Federal websites.

Tax rate	Married filing jointly
10%	Up to $18,650
15%	$18,651 to $75,900
25%	$75,901 to $153,100
28%	$153,101 to $233,350
33%	$233,351 to $416,700
35%	$416,701 to $470,000
39.60%	$470,001 or more

Corporate Tax Rate Schedule (2005 through 2017)
Over	But not over	Tax is	Of amount over
$0	$50,000	15%	$0
50,000	75,000	$7,500 + 25%	50,000
75,000	100,000	13,750 + 34%	75,000
100,000	335,000	22,250 + 39%	100,000
335,000	10,000,000	113,900 + 34%	335,000
10,000,000	15,000,000	3,400,000 + 35%	10,000,000
15,000,000	18,333,333	5,150,000 + 38%	15,000,000
18,333,333	____	35%	0

Scenario 1: Total Income = 500000 + 10000 = 510000
Income Tax percentage as per table = 39.60%
a) Income Tax to be paid = $201960
b) IRS would receive $201960

Scenario 2: Total Income in partnership firm = 500000 There are 5 partners, so income for each partner = 500000/5 = $100000 Interest Income = $2000 Total Individual Income = $100000 + $2000 = $102000 Income Tax percentage as per table = 25% a) Income Tax to be paid by each individual = $25500 b) IRS would receive $127500

Scenario 3: Total Income in company = $500000 Income Tax as per table = 113900 + 34%*(500000-335000) = 170000 Total Profit after tax = 500000-170000=330000 There are 5 partners, so income for each partner = 330000/5 = $66000 Interest Income = $2000 Total Individual Income = $66000 + $2000 = $68000 Income Tax percentage as per table = 15% a) Income Tax to be paid by each individual = $10200 b) IRS would receive $51000