Question

For the current year, Maple Corporation, a C corporation, reports taxable income of $397,000 before paying salary to its sole shareholder, Diane. Diane’s marginal tax rate on ordinary income is 35.9 percent (including the additional Medicare tax) and 18.8 percent on dividend income (including the 3.8% net investment income tax). If Maple pays Diane a salary of $222,000 but the IRS determines that Diane’s salary in excess of $175,000 is unreasonable compensation, what is the amount of the overall tax (corporate level + shareholder level) on Maple’s $397,000 pre-salary income? Assume Maple’s tax rate is 35 percent and it distributes all after-tax earnings to Diane. (Round your intermediate calculations and final answers to the nearest whole dollar amount.)

Answer 1

	Overall tax (combined tax for corporations and shareholders) is $1,67,653.
		With $1,75,000 Salary	Description
1	Taxable income before salary	$ 3,97,000
2	Salary	$ 1,75,000
3	Taxable income	$ 2,22,000	(1) - (2)
4	Entity tax	$     77,700	(3) X 35%
5	After - tax entity earning	$ 1,44,300	(3) - (4)
6	Diane's tax on dividends	$     27,128	(5) X 18.8%
7	Diane's tax on salary	$     62,825	(2) X 35.9%
8	Overall tax	$ 1,67,653	(4) + (6) + (7)
	Note : While calculating the overall tax on Maple corp. Pre - salary taxable income, the $1,75,000 amount the IRS will allow Maple to deduct is taken in to account rather than the $2,22,000 amount it would prefer to deduct.