Question

Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. (Use the tax rate schedule.) a. Using the single individual tax brackets and the corporate tax rate, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues). (Round your intermediate calculations and final answer to nearest whole dollar amount.) es Current tax saved b. How much of the income shčuld be converted into corporate income to maximize tax savings? Income left

Corporate tax rate is 21%

Answer 1

Income from sole proprietorship -$200,000

Other income - $50,000

Tax payable on

Sole proprietorship income = $200,000*21% = $42,000

Other income = 4617.5 + 22%(50,000-40,125)= $6790

Total tax payable = $6790 + $42000 = $48,790

Tax payable before incorporation = $47,367.5 + 35%(250000-207350) =$62,295

Surplus = $62,295 - 48,790 =$13,505

Income left with corporation = $200,000 - $42,000 =$158,000