Question

Boots, Inc. is a “C” corporation engaged in the shoe manufacturing business. Boots is a calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. In answering the questions below, assume for convenience that Emil and Betty each are taxable at acombined federal and state flat rate of 40% on ordinary income and a combined flat rate of 20% on qualified dividends and long-term capital gains.During the current year, Boots has the following income and expense items:

Gross Profit, Sale of Inventory : 2,600,000

Capital Gains: 200,000

Operating Expenses: 800,000

Equipment purchased expenses 100% under 168(k): 800,000

Capital losses: 220,000

(a) Determine Boots, Inc.'s taxable income and its tax liability for the current year

(b) What result in (a), above, if instead of paying dividends Boots pays Emil and Betty salaries of $500,000 each? Has the effectiveness of this traditional strategy to reduce the impact of the double tax on corporate earnings changed as a result of the 2017 Act?

(c) Consider generally whether there is any advantage to operating Boots as a pass-through entity, such as a partnership,limited liability company, or S corporation and, if so, whether Emil and Betty will qualify for the new 20% deduction for qualified business income. What additional facts are necessary to evaluate this option?

Pls answer A, B and C. Pls provide the details of relevant sections as well. Use US tax laws

I know that as per chegg policy 3 sub parts can be answered by you

Answer 1

(a) Boots Inc. Taxable Income and Regular Tax:

Taxable Income:
Inventory Sales	2600000
Capital Gains	200000
Gross Income		28,00,000
Operating Expenses	800000
Equipment expenses	800000
Capital Loss (Limited to gain)	200000	18,00,000
Taxable Income		10,00,000

Regular Tax Liability:
15% of 50,000	7,500
25% of 25,000	6,250
34% of 925,000	3,14,500
First Bubble (5% surcharge)	11,750
Tax	3,40,000

(b)

(i) Option -1 : Payment of Dividends totalling $1,000,000 distributed:

Shareholders tax @20%                                = $200,000

Corporate tax                                    = $340,000

Total tax hit                                        = $540,000

Combined tax rate                          = 54.00%

(iI) Option-2: Payment of Salaries of $1 million paid to Emil and Betty

Shareholders tax @ 40%               = $400,000

Corporate tax                                    = $0

Total income tax hit                        = $400,000

Combined tax rate                          = 40%

It is advisable to pay Salaries instead of Dividends.

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