Question

Keith Thomas and Thomas Brooks began a new consulting business on January 1, 2018. They organized the business as a C corporation, KT, Inc. During 2018, the corporation was successful and generated revenues of $2,000,000. KT had operating expenses of $800,000 before any payments to Keith or Thomas. During 2018, KT paid dividends to Keith and Thomas in the amount of $450,000 each. Assume that Keith’s wife earned $120,000 from her job, they file a joint return, have itemized deductions of $40,000, and have no children.

a) Compute the total tax liability of KT and Keith and his wife for 2018.

b) Instead of organizing the consulting business as a C corporation, assume Keith and Thomas organized the business as a limited liability company, KT, LLC. KT made a distribution of $450,000 each to Keith and Thomas during 2018. Compute the total tax liability of KT and Keith for 2018. Ignore any additional tax on net investment income.

Answer 1

Solution :

A.

Particulars                               Amount (in $)

Revenue                                   2000000

Operating expense    800000

Operating income                       1200000

Dividend paid to (Keith)                450000

Dividend paid to (Thomas)           450000

Retained earnings                        300000

Computation of tax liability of Keith & his wife jointly for 2018

Income of Keith                              $450000

Income of his wife                           $120000

Total income                                      $570000

Less: itemized deduction              $40000

Net total income                              $530000

Tax@32%                                            $169600

Therefore total tax liability $ 169600

Computation of tax liability Of Kt Inc.

Operating income            $1200000

Tax @21%                           $252000