Question

Ms. Xie, who is in the 37 percent tax bracket, is the sole shareholder and president of Xenon. The corporation’s financial records show the following:

Gross income from sales of goods | $ | 1,632,000 | |

Operating expenses | (944,000 | ) | |

Salary paid to Ms. Xie | (314,000 | ) | |

Dividend distributions | (214,000 | ) | |

Compute the combined tax cost for Xenon and Ms. Xie. (Ignore payroll tax.)

How would your computation change if Ms. Xie’s salary was $528,000 and Xenon paid no dividends?

Answer #1

Working: | ||

Particular | Amount($) | |

Gross income from sale of goods | 1,632,000 | |

Operating expenses | (944,000) | |

Salary paid to Ms. Xie | (314,000) | |

Total Income | 374,000 | |

Dividend distributions | (214,000) | |

Balance | 160,000 | |

Computation of tax costs | ||

Corporation tax @ 21% on $ 374,000 | $ 78,540 | |

Tax on Ms Xie @ 37% on ($314,000 + $214,000) | $ 195,360 | |

Computation will not change as tax on ordinary dividend is taxed | ||

at same rate as regular income of the assessee. However if such | ||

dividend is in nature of capital gain than tax rate will change. | ||

However in this case there will not be any change in computation | ||

as dividend income will taxed at regular tax rate in which Xie fall. |

Ms. Xie, who is in the 37 percent tax bracket, is the sole
shareholder and president of Xenon. The corporation’s financial
records show the following.
Gross income from sales of goods
$
1,590,000
Operating expenses
(930,000
)
Salary paid to Ms. Xie
(300,000
)
Dividend distributions
(200,000
)
Compute the combined tax cost for Xenon and Ms. Xie. (Ignore
payroll tax.)
How would your computation change if Ms. Xie’s salary was
$500,000 and Xenon paid no dividends?

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....

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 $220,000. 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...

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 $200,000. 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....

Mrs. Franklin, who is in the 37 percent tax bracket, owns a
residential apartment building that generates $98,000 annual
taxable income. She plans to create a family partnership by giving
each of her two children a 20 percent equity interest in the
building. (She will retain a 60 percent interest.) Mrs. Franklin
will manage the building, and value of her services is $23,000 per
year. If Mrs. Franklin’s children are in the 12 percent tax
bracket, compute the tax savings...

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