Question

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.]

Raabe, Young, Hoffman, Nellen, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040
December 3, 2019
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 2019. 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.
Computation 1 Total tax on $150,000 if you continue as a proprietorship $ _________________ Total tax if you incorporate: Individual tax on $100,000 salary $______________ Corporate tax on taxable income $______________ Total $____________
Although this analysis appears to favor incorporating , it is important to consider that there will  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.
Computation 2 After-tax income left in corporation $___________________ Tax on after-tax income $__________________ Total tax paid if you incorporate $_________________
Comparison of computations 1 and 2 appears to support  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.
Computation 3 After-tax income left in corporation $________________________ Tax on after-tax income $________________________ Total tax paid if you incorporate $________________________
In summary, incorporation  appears to be the more 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

Answer 1

Raabe, Young, Hoffman, Nellen, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040
December 3, 2019
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 2019. 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.
Computation 1 Total tax on $150,000 if you continue as a proprietorship $ 30174.50 Total tax if you incorporate: Individual tax on $100,000 salary $18174.50 Corporate tax on taxable income @21% $10500.00 Total $28674.50
Although this analysis appears to favor incorporating, it is important to consider that there will be additional tax on the $21325.50 of income left in the corporation if you withdraw that amount as a dividend in the future, as calculated below.
Computation 2 After-tax income left in corporation $21325.50 Tax on after-tax income@24% $ 5118.12 Total tax paid if you incorporate $33792.62

Comparison of computations 1 and 2 appears to support continuing as a proprietorship. 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.

Computation 3 After-tax income left in corporation $21325.50 Tax on after-tax income@15% LTCG RATE $ 3198.82 Total tax paid if you incorporate $31873.32

In summary, continuing as a proprietorship appears to be the more 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