Question

Problem below was previously posted with incorrect answers. Please show calculation and answer all the questions. I've attached the tax rate schedule. Thank you.

Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $81,250 per year. The shareholders of Plum are in the 33% tax bracket and dividends are taxable at 15%.

Click here to access the tax rate schedule to use for this problem.

If an amount is zero, enter "0". When required, round your answers to the nearest dollar.

a. Assume that Plum will reinvest its after-tax earnings in the growth of the company.

If Plum operates as a C corporation, the corporation's income tax will be $_______, and the shareholders' liability will be $______.
If Plum operates as an S corporation, the corporation's income tax will be $_______ and the shareholders' liability will be $______.

Therefore, viewed from an entity-owner perspective, operating as a C corporation  will result in overall tax savings.

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b. Assume that Plum will distribute its after-tax earnings each year to its shareholders.

If Plum operates as a C corporation, the corporation's income tax will be $______, and the shareholders' liability will be $______.
If Plum operates as an S corporation, the corporation's income tax will be $______ and the shareholders' liability will be $______.

Therefore, viewed from an entity-owner perspective, operating as a C corporation  will result in overall tax savings.

Income Tax Rates—Corporations Taxable Income The Tax is: Of the Amount Over- Over- 0 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 But not Over- $ 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 15% $ 7,500 + 25% 13,750 + 34% 22,250 + 39% 113,900 + 34% 3,400,000 + 35% 5,150,000+ 38% 35% 50,000 75,000 100,000 335,000 10,000,000 15,000,000

Answer 1

a.

Part 1:

C Corporation pays taxes on $81,250 income earned. Tax applicable on $81,250 is:

Tax payable = $13,750 + ($81,250 - $75,000) × 34% = $15,875

Shareholder of C Corporation is not required to pay taxes until dividends are received. Thus, taxes payable by shareholder of C Corporation is $0.

Part 2:

S Corporation is not required to pay taxes. Thus, taxes payable by plum is $0.

Shareholder of S Corporation is required to pay taxes on their share of S Corporation income at their marginal tax rate. Marginal tax rate of shareholder is 33%. Share of S Corporation income is $81,250. Tax payable by shareholders then is = $81,250 × 33% = $26,812.50

b.

Part 1:

C Corporation pays taxes on $81,250 income earned. Tax applicable on $81,250 is:

Tax payable = $13,750 + ($81,250 - $75,000) × 34% = $15,875

Shareholder of C Corporation is required to pay taxes on dividends received. Dividend amount is $81,750. Dividends are taxable at 15%. Tax paid by shareholders of C Corporation = $81,750 × 15% = $12,262.50

Part 2:

S Corporation is not required to pay taxes. Thus, taxes payable by plum is $0.

Shareholder of S Corporation is required to pay taxes on their share of S Corporation income at their marginal tax rate. Marginal tax rate of shareholder is 33%. Share of S Corporation income is $81,250. Tax payable by shareholders then is = $81,250 × 33% = $26,812.50