Question

Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto Inc., which manufactures greeting cards. Toto’s average annual net profit (before deduction of Mr. Lion’s salary) is $220,000. For each of the following cases, compute the income tax burden on this profit. (Ignore any payroll tax consequences.)

a)Mr. Lion’s salary is $100,000, and Toto pays no dividends.

b)Mr. Lion’s salary is $100,000, and Toto distributes its after-tax income as a dividend.

c)Toto is an S corporation. Mr. Lion’s salary is $100,000, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction.

d)Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction.

e)Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction.

Answer 1

Answer 1.

Corporation tax = (1,20,000*21%) = 25,200

Salary tax = (1,00,000*37%) = $37,000

Income tax = (1,20,000*21%) + (1,00,000*37%) = $62,200

Answer 2.

Corporation tax = (1,20,000*21%) = 25,200

Salary tax = (1,00,000*37%) = $37,000

Dividend tax = (1,20,000 - 25,200)*24% = $22,752

Income tax = 25,200 + 37,000 + 22,752 = $84,952

Answer 3.

S corporation income after Section 199A deduction = (2,20,000*(1-20%)) = $1,76,000

Income tax = 1,76,000*37% = $65,120

Answer 4.

S corporation income after Section 199A deduction = (2,20,000*(1-20%)) = $1,76,000

Income tax = 1,76,000*37% = $65,120

Answer 5.

S corporation income after Section 199A deduction = (2,20,000*(1-20%)) = $1,76,000

Income tax = 1,76,000*37%= $65,120