Question

Explain the tax affect based on providing $180,000 per year for the client's salary and $70,000 per year for his daughter's salary if they withdraw cash from the business or pay dividends as appropriate. Justify the percentage of ownership the client's daughter should have in the business based on the type of business entity recommended. Consider the tax law in reference to the recommendation and how the decision will affect the daughter's tax return. *S Corporation

Answer 1

Bob should divide the amount of $180,000 payment to salary and dividends while Mandy can receive the $70,000 as salary. This is because Mandy has a lower income tax bracket than Bob.$180,000 will be charged as the income tax for the receiver of the salary. $70,000 will be levied as per the income tax for the receiver. Various tax schedules from IRS form 2553 and form 1120S that are related to the S corporation.

Based on the business entity and the nature of corporation the percentage of ownership will remain at 40%. The salary should be reasonable, and if it is reasonable it will provide protection from the sole proprietorship tax .Mandy will continue to receive a reasonable salary.