Question

Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland. Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 21%. The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus. What is the total federal income tax imposed on the corporate income earned by Erie and paid to LaBron as a bonus?

Answer 1

solution
given that
Erie Corporation reported taxable income of $2,200,000 in 20X3 before any deduction for any payment to its sole shareholder and employee, LaBron Cleveland.
Erie paid a bonus of $200,000 to LaBron at year-end. Erie Corporation is subject to a flat-rate tax of 21%.
The bonus meets the requirements to be "reasonable" and is therefore deductible by Erie. LaBron is subject to a marginal tax rate of 35% on the bonus.

Since bonus is a deductible expense, hence the taxable income of Bulldog Corporation tax will be reduced by this amount.
Taxable income of Erie Corporation will be 2200000 - 200000 = 2000000.

Corporate tax = 2000000 * 21% = $420000
Shareholder tax 2000000 * 35% = 700000

Now tax liabilitywill be

Corporate Tax = 420000

Shareholder Tax = 700000

Total Tax $1120000