Question

Problem No. 1: Alissön Grissom Chicken lives in Federal Capital City (FCC), Kingdom of Chicken. Last year, the ruler of the Kingdom of Chicken, Queen Adà II, gave her assent to legislation that reduced the corporate tax rate from 46% to 15% in order to encourage investment, especially in depressed areas of the economy. Allissön owns and operates several restaurants and dance clubs as a sole proprietor. Last year, Allissön’s total income placed her in the 33% – 35% tax bracket. Allissön wants to incorporate all her 25 night clubs and restaurants into “Grissom Corporation International” in order to avail herself of the new lower corporate tax rate. Nevertheless, she is worried about double taxation. She hires you to advise her. Instruct her on what she can do in order to legally minimize her tax burden and also deal with the double taxation problem.

Answer 1

Case Specifics: -

Double Taxation takes place when a particular income is taxed twice. Once at the corporate level and another on the level of the individual itself. It is a known fact, that for high earning people the income tax rates for personal income tend to be relatively higher when compared to corporate taxes respectively.

To reduce the exposure to taxation and to ensure that double taxation problem does not happen, it is advisable that Alisson Grissom opens a company and operates all of the ventures under one roof. Since corporate tax rates have been lowered from 46% to 15% only, it would save 20% of taxes for Alisson.

Furthermore, the key strategy to avoid double taxation would be to take payments from the newly established company in the form of salaries. These salaries are deductible from the company’s revenue and reduce their profit margins. While on part of the individual they become taxable. Further one more strategy to be able to avoid double taxation is to retain a part of the profits in business.

Usually governments allow for retained earnings or reinvested earnings to be charged lesser taxes this provisioning lowers the actual profit of the company and decreases the overall tax liability while ensuring that double taxation does not take place as the income never changes hands but is rather used for alternative purposes.

Conclusion: -

Thus. we can conclude by saying this, that due to the fact that the company tax rates are much lower than individual tax rates the company should indeed be opened by Allision. Further she can withdraw salaries form the company in order to meet her expenses and to ensure that double taxation does not take place. She can also reinvest the money back into the business to avoid this situation even further.

Please feel free to ask your doubts in the comments section if any.