Question

Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto,Inc., which manufactures greeting cards. Toto’s average annual net profit (before deduction of Mr. Lion’s salary) is $360,000. For each of the following cases, compute the income tax burden on this profit. (Ignore any payroll tax consequences.)

a. Mr. Lion’s salary is $100,000, and Toto pays no dividends.

b. Mr. Lion’s salary is $100,000, and Toto distributes its after-tax income as a dividend.

c. Toto is an S corporation. Mr. Lion’s salary is $100,000, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent Section 199A deduction.

d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent Section 199A deduction.

e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent Section 199A deduction.

Answer 1

Solution:

a.

Particulars	Amount
Corporate taxable income (after salary deduction)	$100,000
Corporate tax on $100,000	$22,250
Mr. Lion’s tax ($100,000 salary * 37%)	$37,000
Tax burden on profit	$59,250

b.

Particulars	Amount
Corporate taxable income (after salary deduction)	$100,000
Corporate tax on $100,000	$22,250
Mr. Lion’s tax ($100,000 salary * 37%)	$37,000
Mr. Lion’s tax on dividend ($777,50*20%)	$15,550
Tax burden on profit	$74,800

c.

Particulars	Amount
Corporate ordinary Income(after salary deduction)	$100,000
Mr. Lion’s tax burden:
($100,000 salary + $100,000 corporate income)* 37%	$74,000

d.

Particulars	Amount
Corporate ordinary Income	$360,000
Mr. Lion’s tax burden:
($360,000 corporate income)* 37%	$133,200

e.

Particulars	Amount
Corporate ordinary Income(after salary deduction)	$360,000
Mr. Lion’s tax burden:
($360,000 corporate income)* 37%	$133,200