Question

For the current year, Maple Corporation, a C corporation, reports taxable income of $252,000 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 $198,000 but the IRS determines that Diane’s salary in excess of $150,000 is unreasonable compensation, what is the amount of the overall tax (corporate level + shareholder level) on Maple’s $252,000 pre-salary income? Assume Maple’s tax rate is 35 percent and it distributes all after-tax earnings to Diane.

This is the 3rd time im trying to question. Note it is not 98,145 :)

Answer 1

Solution:

Taxable income before salary for Maple corporation = $252,000

Allowable salary deduction = $150,000

Income after salary for maple corporation = $252,000 - $150,000 = $102,000

Tax on Taxable income (after salary) = $102,000 * 35% = $35,700

Net income after salay for maple corporation = $102,000 - $35,700 = $66,300

As maple corporation distributes all after tax earnings therefore

Diane's tax on dividends = $66,300 * 18.8% = $12,464

Diane's tax on salary = $150,000 * 35.9% = $53,850

Overall tax = Tax on maple corporation + Tax on diane's dividend income + Tax on diane's salary

= $35,700 + $12,464 + $53,850 = $102,014