Question

Katherine,a single? taxpayer, operates adance studio.She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $18,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annuall $47,000of taxable income before considering a deductible salary expense. Requirement Which business? form(s) can best achieve Katherine?'s ?goals? Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions. Assume that the C corporation is in the 15?% corporate tax? bracket,Katherine is in the 25?% individual tax bracket for ordinary? income, and Katherineis taxed at 15?%

on dividend income. When considering either corporate? option, perform the analysis first by treating any withdrawals as deductible salary payments of the corporation. Then do the analysis by treating them as nondeductible dividends or distributions. Ignore employment taxes.

Complete the table to determine the amount of total tax for each business form. Start with the entity? level, then determine Katherine?'s tax and finally the total tax.?

For simplification? purposes, please use a 25?% tax rate to calculate the tax on Katherine?'s

ordinary? income

	Sole		C Corporation		C Corporation		S Corporation		S Corporation
	Proprietorship		with Salary		with Dividend		with Salary		with Distribution
Entity Level:
Income before salary
Salary deduction
Taxable income
Entity level tax

Answer 1

	Sole		C Corporation		C Corporation		S Corporation		S Corporation
	Proprietorship		with Salary		with Dividend		with Salary		with Distribution
Entity Level:
Income before salary	47000		47000		47000		47000		47000
Salary deduction	18000		18000		18000		18000		18000
Taxable income	29000		29000		47000		29000		29000
Entity level tax	=29000*15%		=29000*15%		=47000*15%		0		0
	4350		4350		7050
Tax for Katherine	0		=18000*25%		=18000*25%		=18000*25%		=29000*25%+18000*15%
			4500		4500		4500		9950
Total Tax	4350		8850		11550		4500		9950
Therefore in the given case, Katherine should choose S Corporation with Salary.
Note-
Best effort have been made to answer the question correctly, in case of any discrepencies kindly comment and i will try to resolve it as soon as possible.
Please provide positive feedback.