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 $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. 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.

Answer #1

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...

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?

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. Young operates a photography studio as a sole
proprietorship. His average annual income from the business is
$100,000. Because Mr. Young does not need the entire cash flow for
personal consumption, he is considering incorporating the business.
He will work as a corporate employee for a $40,000 annual salary,
and the corporation will accumulate its after-tax income to fund
future business expansion. For purposes of this case, assume that
Mr. Young’s marginal income tax rate is 32 percent and...

an operates a housecleaning business as a sole proprietorship.
She oversees a team of 10 cleaning personnel, markets the business,
and provides supplies and equipment. The business has been
generating net taxable profits of $50,000 per year, before
considering the QBI deduction. As a sole proprietor, Megan
qualifies for the 20 percent deduction, reducing taxable income
from the business to $40,000.
a. Assume that Megan’s marginal tax rate on
ordinary income is 35 percent and that she has no pressing...

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...

Mr. A, who has a 35 percent marginal tax rate, must decide
between two investment opportunities, both of which require a
$50,000 initial cash outlay in year 0. Investment 1 will yield
$8,000 before tax cash flows in years 1, 2, and 3. This cash
represents ordinary taxable income. In year 3, Mr. A can liquidate
the investment and recover his $50,000 cash outlay. He must pay a
nondeductible $200 annual fee (in years 1, 2, and 3) to maintain...

Mr. A, who has a 35 percent marginal tax rate, must decide
between two investment opportunities, both of which require a
$50,000 initial cash outlay in year 0. Investment 1 will yield
$8,000 before tax cash flow in years 1, 2, and 3. This cash
represents ordinary taxable income. In year 3, Mr. A can liquidat
the investment and recover his $50,000 cash outlay. He must pay a
non deductible $200 annual fee (in years 1, 2, and 3) to...

In 2020, Mason (single) is a 50 percent shareholder in Angels
Corp. (an S Corporation). Mason receives a $180,000 salary working
full time for Angels Corp. Angels Corp. reported $400,000 of
taxable business income for the year (2020). Before considering his
business income allocation from Angels and the self-employment tax
deduction (if any), Mason’s adjusted gross income is $180,000 (all
salary from Angels Corp.). Answer the following questions for
Mason. (Leave no answer blank. Enter zero if
applicable.)
a. Assuming...

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