Question

Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. (Use the tax rate schedule).

a. Using the single individual tax brackets and the corporate tax rate of 21 percent, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues).

Answer 1

Answer:-

1. From the actualities given in the problem,let's accept that's Moana will probably limit her present government pay assess presentation.
2. An individual can look at the single individual and corporate duty rate calendars to accomplish this objective. Moana's taxable salary would be $50,000 (Difference somewhere in the range of $250,000 and $200,000)but not identified with her sole proprietorship.

Individual's tax rate slabs :-

Amounts	Percentages
$0 to $9,325	10%
$9,326 to $37,950	15%
$37,951 to $91,900	25%
$91,901 to $191,650	28%
$191,651 to $416,700	33%

Corporate's tax rate slabs :-

Amounts	Percentages
Up to $50,000	15%
$50,000 to $75,000	25%
$75,000 to $100,000	34%
$100,000 to $335,000	39% and so on......

• Since Moana's taxable individual wage is $50,000, she fall in 25% expense section.
• Presently the assignment will be to allot $200,000 among people and corporate's taxable salary to limit the aggregate duties payable by her.
• To exploit the 15 rate corporate duty bracket,$50,000 of the normal $200,000 in benefits ought to be held in the corporation.($50,000 is the width of the 15 percent corporate expense section) .
• Accepting the company holds $50,000 of benefit, the enterprise's peripheral duty rate likewise would now be 25 percent.
• Presently, Moana is impassive among individual and corporate assessment rate of 25% slab.let's accept that, everything equal,Moana wants to get the benefits by and by .
• To exploit Moana's 25% individual duty bracket,the next $53,950 of the normal $200,000 in benefits ought to be moved to Moana. ($53,950 is the rest of the width of Moana's 25% duty section).
• Moana's peripheral assessment rate would now be 28%. Proceeding with this same choice process,$75,000 of the normal benefits are held in the partnership and $125,000 of the benefits are moved to Moana.

a. Using the single individual tax brackets and the corporate tax rate of 21 percent, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues):-

Taxes on monan's individual income

$9,325 * 10% = $9,325 * 0.1 = $932.5	$932.5
( $37,950 -  $9,326) * 15% = $28,625 * 0.15 = $4,293.75	$4,293.75
($91,900 -  $37,951) * 25% = 53,949 * 0.25 = $13,487.25	$13,487.25
($191,650 - $91,901) * 28% = 99,749 * 0.28 = $27,929.72	$27,929.72
Total taxes on my salary	= $4,293.75 + $13,487.25 + $27,929.72 = $45,710.72

Taxes on corporate income:-

$50,000 * 15% = $7,500	$7,500
$75,000 - $50,000 ) * 25% = 25,000 * 0.25 = $6250	$6250
Total taxes in corporate income	=  $6250 + $7,500 = $13,750

Total taxes = individual taxes - corporate taxes

= $45,71.72 -  $13,750

= $59,460.72

Total taxes = $59,460.72