Question

Paige is starting Paige's Poodle Parlor and is considering alternative organizational forms. she anticipates the business will earn $120,000 for operating before compensating her for her services. Page, who is single has $6,000 of income from other sources and other itemixed dudctions of $10,000. her compensiation wages for services will be $60,000. other distributions (dividends) to her form the business are expected to be $`4,000

Answer 1

CALCULATION OF ADJUSTED GROSS INCOME and TOTAL TAX OF PAIGE IN RESPECT OF 3 CASES:

1.PROPRIETOR 2. S CORPORATION 3.C CORPORATION

PARTICULARS	PROPRIETORSHIP	S.CORPORATION	C.CORPORATION
Business Income
Operating Income	$1,20,000	$1,20,000	$1,20,000
Compensation Paid	-	($60,000)	($60,000)
Net	$1,20,000	$60,000	$60,000
Corporate Income Tax			21%($60,000) =$12,600
Paige's Income
Business Income (above)	$1,20,000	$60,000	-
Compensation (above)	-	$60,000	$60,000
Dividends	-	-	$4000
Other Income	$6000	$6000	$6000
Adjusted Gross Income	$1,26,000	$1,26,000	$70,000
Less:Standard Deductions	($12,000)	($12,000)	($12,000)
Taxable Income	$1,14,000	$1,14,000	$58,000
Individual Income tax	$21,648	$21,648	$12,540
Total Tax	$21,648 (W.N-1)	$21,648 (W.N-1)	$12,540(W.N-2)

As per Federal Income Tax Rates of 2018:

Working Note:

1.upto $9525 =9525*10% +12%($38,700-$9,526) +22%($82,500-$38,701)+24%($1,14,000-$82,501)

= $952.50 +$3500+$9636+$7559.76

=$21,648.26

2.Tax on Dividend :$4,000*30%=$1200 plus

Tax on Taxable Income :$58,000-$4,000=$54,000 *21% flat rate =$11,340

= Tax on Taxable Income +Tax on Dividend = $11340+$1200 = $12,540

Itemized deductions are deductible ; but no personal expenditure can be claimed from the year 2018,hence standard deduction limit has increased to $12,000

Hence ,Instead of $10,000 Itemised deduction ,we take standard deduction which leads to decrease in the taxable income.