Question

Purple Company has $200,000 in net income for 2018 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single and she claims the $12,000 standard deduction for 2018. Purple Company is Kirsten’s only source of income. Ignoring any employment tax considerations, compute Kirsten’s after-tax income if:

a. Purple Company is a proprietorship and Kirsten withdraws $50,000 from the business during the year; Kirsten claims a $40,000 deduction for qualified business income ($200,000 x 20%).

b. Purple Company is a C corporation and the corporation pays out all of its after-tax income as a dividend to Kirsten.

c. Purple Company is a C corporation and the corporation pays Kirsten a salary of $158,000.

Answer 1

a.

Income from proprietorship	200000
Deductions	(12000)
Taxable Income	188000
Tax on 188000(18713.75plus 28% of amount over 91900)	42738.25
After tax income	157261.75

b.

Tax on $200,000 (22250+39% of amount over 100000) = $ 61,250

Corporation’s after-tax income ($200,000 – $61,250) $138,750.

Kirsten’s taxable income ($138,750 dividend – 12000standard deduction) = $126,750

Kirsten’s tax on $126750 at rates applicable to dividends [($36,900 × 0%) + .15($126750 – $36,900)]

=$ 13,477.50

Kirsten’s after-tax income ($138,750 – $13,477.50)= $125272.50

c.

The corporation will have taxable income of $61,250 ($200,000 net income beforecompensation deduction – $138,750 salary).

Kirsten will have taxable income of $126750($138,750 – $12000 Standard Deduction).

Tax liability $18713.75 plus 28% of amount over $91900

= 18713.75+34850*28%

= 28471.75

Her tax will be 28471.75 and her after tax income is 98278.75