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Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Each...

Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Each of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately $450,000. The entity will distribute enough cash, as a dividends distribution, each year to Mabel and Alan to cover their Federal income taxes associated with the franchise (excluding any tax related to their salaries). If an amount is zero, enter "0".

a. What amount will the entity distribute (to cover Mabel and Alan's Federal income taxes associated with the franchise) if the franchise operates as a C corporation?

The corporation will need to distribute $ _____ each to Mabel and Alan.

b. What amount will the entity distribute (to cover Mabel and Alan's Federal income taxes associated with the franchise) if the franchise operates as an S corporation? Ignore the impact of any potential qualified business income deduction.

The corporation will need to distribute $ ______ each to Mabel and Alan.

c. What will be the amount of the combined entity/owner tax liability (including salaries) in parts (a) and (b)?

Part (a): $ ____

Part (b): $ ____

Solutions

Expert Solution

Part A

Answer is $158,750

50,000 X 15% = $ 7,500

25,000 X 25% = 6,250

25,000 X 34% = 8,500

350,000 X 39% = 136500

Part B

Answer is $72000 (2250000*32%)

Part C

The combined entity/owner tax liability in a. will be as follows:

C corporation = $158750

Shareholders on distribution =0

Shareholders on salaries ($175,000 X 32%) = 56,000

Combined tax liability = $214,750

The combined entity/owner tax liability in b. will be as follows:

S corporation = $0

Shareholders taxed on S corporation earnings ($450000 X 32%) = 144,000

Shareholders on salaries ($175000 X 32%) = 56,000

Combined tax liability = $200,000

jeff jeffy answered 2 years ago
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