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 $430,000. 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.

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 $430,000. For each of the following cases, compute the income tax burden on this profit. (Ignore any payroll tax consequences.)

1. Mr. Lion’s salary is $100,000, and Toto pays no dividends.
2. Mr. Lion’s salary is $100,000, and Toto distributes its after-tax income as a dividend.
3. 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.
4. 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.
5. 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.

a. income tax burden on this profit
b.income tax burden on this profit
c. income tax burden on this profit
d. income tax burden on this profit
e. income tax burden on this profit

Answer 1

a.	Corporate of Taxable Income(after Salary Deduction)	$330000
	Corporate Tax [330000 * 0.21]	$69300
	Mr. Lion's Tax ( $100000 *37%)	$37000
	Tax Burden on Profit (69300+37000)	$106300
b.	Corporate of Taxable Income(after Salary Deduction)	$330000
	Corporate Tax (a)	$69300
	Mr. Lion's Tax on Salary ( $100000 *37%) (b)	$37000
	Mr. Lion's Tax on Dividend [ (330000-69300)*20/100]	$52140
	Tax Burden on Profit (a+b+c)	$158440
c.	Corporate Ordinary Income(after Salary Deduction)	$330000
	Mr. Lion's Tax Burden	$134680
	($100000 Salary+ $330,000 Corporate Income - $66,000 deduction) × 37%
d.	Corporate Ordinary Income	$430000
	Mr. Lion's Tax Burden	$127280
	($430,000 corporate income - $86,000 deduction) × 37%
e.	Corporate Ordinary Income	$430000
	Mr. Lion's Tax Burden	$127280