Question

In: Accounting

Lorelei files HOH and owns an inn called The Dragon Fly. Currently The Dragon Fly is...

Lorelei files HOH and owns an inn called The Dragon Fly. Currently The Dragon Fly is a single member LLC and all income is reported on her personal income tax return. During 2016, the net profit from The Dragon Fly was $175,500. Lorelei has additional taxable income of $115,000. She is considering incorporating The Dragon Fly. Please calculate the following:

What is Lorelei’s 2016 income tax liability if The Dragon Fly remains a Single Member LLC?

What is Lorelei’s minimum 2016 income tax liability (both individual & corporate) if she incorporates The Dragon Fly, assuming she is able to pay herself the desired salary?

What should she do? Explain.

Expert Solution

Case 1: Lorelei’s 2016 income tax liability if The Dragon Fly remains a Single Member LLC.

A single member LLC is taxed as a sole proprietorship. That is, the information about the LLC's income and expenses, and its net income, is prepared using Schedule C. the net income is then brought over to the owner's personal tax return.

Therefore the taxable income in this case for Lorelei is $290,500 ($115,000 + $175,500)

Tax liability falls under the slab: $190,151 - $413,350, which is

$46,278.75 plus 33% of the amount over $190,150

Thus tax liability:

= $46,278.75 + $(290,500-190,150)*33%

=$46,278.75+$33,115.5

=$79,394.25

Case 2: Lorelei’s minimum 2016 income tax liability (both individual & corporate) if she incorporates The Dragon Fly, assuming she is able to pay herself the desired salary.

If Lorelei incorporates The Dragon Fly, then she has to pay the personal tax on her separate income which is $115,000 and The Dragon Fly as an separate corporation has to pay tax on income of $175,500.

Therefore her 2016 taxable income falls under the slab: $91,151 - $190,150, which is

$18,558.75 plus 28% of the amount over $91,150

Thus her personal tax liability:

=$18,558.75 + $(115,000-91,150)*28%

=$18,558.75 + $6,678

=$25,236.75

In 2016 the tax rate was 34% of the taxable income for corporate and 35% if the taxable income is above $335,000

Therefore the tax liability of The Dragon Fly is:

=34%*$175,500

=$59,670

What should she do?

Total tax liablity if she does not incorporates The Dragon Fly is $79,394.25

Total tax liability if she incorporates The Dragon Fly is $84,906.75 ($59,670+$25,236.75)

Therefore she should not incorporate The Dragon Fly as this way she'll be able to save tax of $5,512.50

ekkarill92 answered 2 years ago

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