Question

Boots, Inc. is a “C” corporation engaged in the show manufacturing business. Boots is a Calendar year, accrual method taxpayer with two equal shareholders, Emil and Betty, who are unrelated cash method taxpayers. In answering the questions below, assume for convenience that Emil and Betty each are taxable at a combined federal and state flat rate of 40% on ordinary income and combined flat rate of 20% on qualified dividends and long-term capital gains. During the current year, Boots has the following income and expense items.

Income

• Gross profit-Sales of inventory-------$2,600,000
• Capital Gains------------------------------$200,000

Expense and Losses:

• Operating Expense----------------------$800,000
• Equipment Purchase (100% Expensed) ---$800,000
• Capital Loses-------------------------------$220,000

1. Determine Boots, Inc.’s Taxable income and its tax liability for the current year.
2. What result in (a), above, if Boots distribute its after-tax profits to Emily and Betty as qualified dividends?
3. What result in (a) above, if instead of paying dividends Boots pay Emil and Betty salaries of $500,000 each? Has the effectiveness of this traditional strategy to reduce the impact of the double tax on corporation earning changed as a result of 2017 Act?
4. Consider generally whether there is any advantage to operating Boots as a pass-through entity, such as a partnership, limited liability company, or S Corporation and, if so, whether Emil and Betty will qualify for the new 20% deduction for qualified business income. What additional facts are necessary to evaluate this options?

Answer 1

1. Calculation of income of Boots Inc:

Operation Income = $2600000-$800000-$800000 = $1000000

Net Capital Gain = $200000 - $220000 = Loss Of $20000

Corporate Tax Rate is 21%

So taxable Income is $ 1000000

Tax Liability = $1000000*21% =$210000

2. If Boots Inc Distributes after-tax profits to the shareholders as qualified dividends, then tax liability for the Boots Inc will remain the same as dividends are taxable in hands of both company and Shareholders.

3. If Boots pay  Emil and Betty salaries of $500,000 each, then Boot's expenses increased by $ 1000000

and taxable will become nil and reduce tax liabilty of Rs. $210000