Question

2.It is 2017 and Alison has the following investments. She owns 20% of Global & Associates. Global pays Alison $70,000 distribution (dividend) and has sales income of $500,000 and operating expenses of $100,000. How will Alison’s personal tax return be affected if?

a. Global is a C-Corporation

b. Global is a Partnership

c. Global is a S-Corporation

d. Global is an LLC. If you need more information please indicate what information you would need.

e. How would your answer change to part c if this were 2018 instead?

Answer 1

A). Global is a C-Corporation :

There is double taxation of dividend. C-Corps pay taxes at the corporate level first. After that, individual shareholders pay taxes on dividends paid by the corporation.

C-Corp reduces business taxable income by deducting operating expenses from revenue ($500,000-$100,000= $400,000) and thus, the taxable income is $400,000. Secondly, Aldison will be taxed only if Global distributes dividend and thus, is taxed at regular tax rate.

B). Global is partnership :

The distribution of $70,000 will be taxed as per prevalent tax rate as personal income and not dividend. Unlike the corporations, the distribution received by Aldison is her personal income and not taxed under the head "Income from Other Sources".

C). Global is a S-Corporation :

The income and losses of the company are divided between the shareholders and pass through to their personal income taxes. Therefore, the S Corporation is not taxed at the corporate level, but only the shareholders are taxed at their individual level. There is no double taxation as contrary to C-Corporation. Thus, the dividend amount of $70,000 will be taxed in the return of Aldison under the head "Income from Other Sources".

D). Global is LLC :

The distribution received by Aldison of $70,000 will be taxed in personal return. Like, partnership firms LLC members do not receive dividend payments. They receive distributions of profit and thus taxed as personal income.

Tax rate 2017 -

LTCG & Qualified dividends Taxable income between

15% $191,650 to $418400

20% $418400 onwards

Tax rate 2018 -

Qualified dividend are taxed at the capital gains rates, which are lower. For the 2018 tax year, you will not need to pay any taxes on qualified dividends as long as you have $38,600 or less of ordinary income. If you have between $38,600 and $425,800 of ordinary income, then you will pay a tax rate of 15% on qualified dividends. The rate for $425,801 or more is 20%.