Question

In the current year, Azure Company has $350,000 of taxable income income before deducting any compensation or other payment to its sole owner, Sasha. Azure also has interest on municipal bonds of $25,000 not included above. Sasha has significant income from other sources and is in the 37% marginal tax bracket and is otherwise in the 20% long-term gain tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the deduction for qualified business income and the 3.8% Medicare surtax on net investment income.)

1. Azure is a C corporation and pays no dividends or salary to Sasha. Azure and Sasha  .

2. Azure is a C corporation and distributes $75,000 of dividends to Sasha. Azure and Sasha  .

3. Azure is a C corporation and pays $75,000 of salary to Sasha. Azure and Sasha  .

4. Azure is a sole proprietorship, and Sasha withdraws $0. Azure  and Sasha  .

5. Azure is a sole proprietorship, and Sasha withdraws $75,000. Azure and Sasha  .

Answer 1

Ans-A-Azure is a C corporation and pays no dividends or salary to Sasha:-

Azure company has corporate income tax of  $73500 [350000*21%] based on taxable income of $350,000. Since Sasha received no dividends and salary from Azure during the year. She is not currently taxed on any of the corporation's income.

B-Azure is a C corporation and distributes $75,000 of dividends to Sasha:-

Azure Company has corporate income tax of $73500 [350000*21%, since dividend are not deductible], and Sasha incurs income tax of $15000 [75000*20%] with respect to dividends.

C-Azure is a C corporation and pays $75,000 of salary to Sasha:-

The salary paid to sasha is deductible by Azure company resulting in taxable income of $275000 and corporate income tax of $57750 [275000*21%]. Sasha incurs income tax of $27750 with respect to the salary she received during the year.

D-Azure is a sole proprietorship, and Sasha withdraws $0:-

There is no federal income tax applicable to businesses formed as sole proprietorship. Sasha incurs income tax of $129,500 with respect to Azure Company.

E-Azure is a sole proprietorship, and Sasha withdraws $75,000:-

There is no federal income tax applicable to businesses formed as sole proprietorship. Sasha will pay tax on the income of Azure Company regardless of the amount withdraws.