Question

In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has an interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 37% marginal tax bracket.

Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the deduction for qualified business income and the 3.8% Medicare surtax on net investment income.)

The rates on qualified dividends are 0%, 15% and 20%.

If an amount is zero, enter "0".

a. Azure is a C corporation and pays no dividends or salary to Sasha.

Azure Company, as a C corporation, has taxable income of $_________ and corporate income tax of $__________. Sasha has taxable income of $________ from Azure.

b. Azure is a C corporation and distributes $75,000 of dividends to Sasha.

Azure Company has taxable income of $________ and corporate income tax of $_________. Sasha incurs income tax of $_______ with respect to the dividends.

c. Azure is a C corporation and pays $75,000 of salary to Sasha. (Ignore payroll taxes.)

The salary paid to Sasha (is / is not) deductible by Azure Company resulting in taxable income of $________ and corporate income tax of $_______. Sasha incurs income tax of $_____ with respect to the salary she received during the year.

d. Azure is a sole proprietorship, and Sasha withdraws $0. (Ignore self-employment taxes.)

There (is/ is no) Federal income tax applicable to businesses formed as sole proprietorships. Sasha incurs income tax of
$________ with respect to Azure Company.

e. Azure is a sole proprietorship, and Sasha withdraws $75,000. (Ignore self-employment taxes.)

There (is/ is no) Federal income tax applicable to businesses formed as sole proprietorships. Sasha (will/ does not) pay tax on the income of Azure Company,(decreased by/ regardless of /increased by) the amount she withdraws.

Answer 1

Part A

Azure Company, as a C corporation, has taxable income of $350000 and corporate income tax of $73500 (350000*21%). Sasha has taxable income of $0 from Azure (Sasha received no dividends or salary from Azure company).

Part B

Azure Company has taxable income of $350000 and corporate income tax of $73500 (as dividend distributions is not deductible) Sasha incurs income tax of $11250 (75000*15%) with respect to the dividends.

Part C

The salary paid to Sasha is deductible by Azure Company resulting in taxable income of $275000 (350000-75000) and corporate income tax of $71443 (46628+(35%*(275000-204100))). Sasha incurs income tax of $27750 (75000*37%) with respect to the salary she received during the year.

Part D

There is no Federal income tax applicable to businesses formed as sole proprietorships. Sasha incurs income tax of $129500 (350000*37%) with respect to Azure Company.

Part E

There is no Federal income tax applicable to businesses formed as sole proprietorships. Sasha will pay tax on the income of Azure Company, regardless of the amount she withdraws.

Note: interest on municipal bonds are exempt from tax for both corporations and individuals