In: Accounting
blem 2-39 (LO. 1, 4, 7)
Benton Company (BC) has one owner, who is in the 33% Federal income tax bracket. BC's gross income is $395,000, and its ordinary trade or business deductions are $245,000.
Click here to access the tax table to use for this problem.
If required, round computations to the nearest dollar.
a. BC is operated as a proprietorship, and the owner withdraws $100,000 for personal use. BC's taxable income for the current year is $, and the tax liability associated with the income from the sole proprietorship is $.
b. BC is operated as a corporation, pays out $100,000 as salary, and pays no dividends to its shareholder. BC's taxable income for the current year is $, and BC's tax liability is $. The shareholder's tax liability is $.
c. BC is operated as a C corporation and pays out no salary or dividends to its shareholder. BC's taxable income for the current year is $, and BC's tax liability is $.
d. BC is operated as a corporation, pays out $100,000 as salary, and pays out the remainder of its earnings as dividends. BC's taxable income for the current year is $, and BC's tax liability is $.
e. Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship. Robert is thinking about incorporating the business for next year and asks your advice. He expects about the same amounts of income and expenses and plans to take $100,000 per year out of the company whether he incorporates or not.
Complete the letter to Robert containing your recommendations. [Based on your analysis in (a), BC is operated as a proprietorship, and the owner withdraws $100,000 for personal use, and in (b), BC is operated as a corporation, pays out $100,000 as salary, and pays no dividends to its shareholder.]
Hoffman, Raabe, Young, Nellen, &
Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 |
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December 1, 2017 | ||||||||||||||||
Mr. Robert Benton | ||||||||||||||||
1121 Monroe Street | ||||||||||||||||
Ironton, OH 45638 | ||||||||||||||||
Dear Mr. Benton: | ||||||||||||||||
This letter is in response to your inquiry as to the tax effects of incorporating your business in 2017. I have analyzed the tax results under both assumptions, proprietorship and corporation. I cannot give you a recommendation until we discuss the matter further and you provide me with some additional information. My analysis based on information you have given me to date is presented below. | ||||||||||||||||
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Although this analysis appears to favor , it is important to consider that there be additional tax on the $ of income left in the corporation if you withdraw that amount as a dividend in the future, as calculated below: | ||||||||||||||||
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Comparison of computations 1 and 2 appears to incorporating. If you incorporate and recover the income left in the corporation as long-term capital gain from a sale of stock in the future, the total tax cost of incorporating will be the same, as shown in computation 3 below. | ||||||||||||||||
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In summary,incorporation appears to be the most attractive option. However, there are important nontax considerations with respect to this decision. We can discuss those issues at our next meeting. | ||||||||||||||||
Thank you for consulting my firm on this important decision. We are pleased to provide analyses that will help you make the right choice. | ||||||||||||||||
Sincerely, | ||||||||||||||||
Jon Thomas, CPA |
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