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.) Current tax saved b. How much of the income should be converted into corporate income to maximize tax savings? Income left

Answer 1

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Answers are highlighted in yellow: As per tax year 2020: Solution: $ 13,505 Answer: a) Explanation: Particulars Tax on $250000 (47367.50)+(250000-207350)*35% Less: Tax on (250000-200000): (4617.50)+(50000-40125)*22% Less: Tax on (200000) (200000*21%) Current Tax Saved Year 2020 62295 -6790 -42000 13,505 $ $200,000 Answer: b) Explanation: Because, corporate tax rate is flat 21% which is lower than individual marginal rate. The entire $200,000 should be left in corporate.