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.