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.

b. How much income should be left in the corporation?

Individuals Schedule X-Single If taxable income is over: But not over: The tax is: $ 0 $ 9,700 10% of taxable income $ 9,700 $ 39,475 8970 plus 12% of the excess over $9.700 $ 39,475 $ 84,200 $4,543 plus 22% of the excess over $39,475 $ 84,200 $160,725 $14,382.50 plus 24% of the excess over $84.200 $160,725 $204,100 $32.748.50 plus 32% of the excess over $160,725 $204,100 $510,300 $46,628.50 plus 35% of the excess over $204,100 $510,300 - $153,798.50 plus 37% of the excess over $510,300 Schedule Y-1-Married Filing Jointly or Qualifying Widow(er) If taxable income is over: But not over: The tax is: $ 0 $ 19,400 10% of taxable income $ 19,400 $ 78,950 $1,940 plus 12% of the excess over $19.400 $ 78,950 $168,400 $9,086 plus 22% of the excess over $78,950 $168,400 $321,450 $28,765 plus 24% of the excess over $168.400 $321,450 $408,200 $65,497 plus 32% of the excess over $321.450 $408.200 $612,350 $93,257 plus 35% of the excess over $408,200 $612,350 - $164.709.50 plus 37% of the excess over $612.350 Schedule Z-Head of Household

Answer 1

Orie & Jane has taxable income other that sole proprietorship of ($450000 - $250000) which is $200000. Therefore, they are in tax bracket of 24%.

The corporation tax rate is 21% which lower than the current tax bracket rate of 24%. Hence, all income of sole proprietorship should be transferred to corporation.

a) Tax on total $450000 taxable income assuming incorporated in sole proprietorship

$93257 + ($450000 - $408200)*35% = $107887

b) Tax on $250000 pertaining to corporation

$250000 x 21% = $52500

C) Tax on $200000 ($450000 - $250000) assuming incorporated in business

$28765 + ($200000 - $168400)24% = $36349

d) Tax Savings = a - b - c = $19038

Hence, current tax that could be saved by Orie & Jane is $19038.

Income that should be left in the corporation is $250000.