Question

Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $450,000, of which $250,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. (Use the tax rate schedule). a. Using the married-joint tax brackets and the corporate tax rate of 21 percent, find out how much current tax this strategy could save Orie and Jane..

What is the current tax saved?

How much income is left in the corporation?

Use the tax rate schedule listed below.

Schedule Y-1-Married Filing Jointly or Qualifying Widow(er) If taxable income is over: But not over: The tax is: 10% of taxable income $1,940 plus 12% of the excess over $19,400 $9,086 plus 22% of the excess over $78,950 S28,765 plus 24% of the excess over $168,400 $ 19,400 $ 19,400 $ 78,950 $ 78,950 $168,400 $168,400 $321,450 S65,497 plus 32% of the excess over $321,450 $93,257 plus 35% of the excess over $408,200 $321,450 $408,200 $408,200 $612,350 S164,709.50 plus 37% of the excess over S612,350 $612,350

Answer 1

Total Income	450000
Tax Based Slab System
Tax Payable
Upto 408200	93257
From 408200 to 450000	14630
Total Tax	107887
If couple opt for Taxation of Sole Prop
Normal income	200000
Business Income	250000
Tax Payable
Business Income @ 21%	52500
Balance 200000 Taxability
Upto 168400	28765
from 168400 to 200000	7584
Total tax payable	88849
Net Tax Saved	19038	Recommeded to go live with proprietor structure as it will save tax