Question

The Booth Corporation, a C corporation, is owned 100% by Ralph Hill and had taxable income in 2019 of $550,000. Ralph is also an employee of the corporation. In December 2019, the corporation has decided to distribute $460,000 to Ralph and has asked you whether it would be better to distribute the money as a dividend or salary. Ralph, a single taxpayer, is in the 37% marginal tax bracket. How would you respond to Booth Corporation? Consider only income taxes for this problem. (Ralph's taxable income exceeds $434,550.) (Click the icon to view the tax rates for 2019.) Calculate the taxes for Booth and Ralph under each option. (For the purpose of this analysis, we will only consider the marginal and capital gain rates for Ralph. Ignore additional taxes imposed on high income taxpayers.) Distributed as dividend Distributed as salary Taxes for Booth Taxes for Ralph Total tax liability

Answer 1

		Distributed as Divided	Distributed as Salary
	Taxes for booth (Working 1& 2)	$115,500.00	$ 18,900.00
Add	Taxes for Ralph (Working 3& 4)	$ 92,000.00	$ 170,200.00
Equal	Total Tax Liability	$ 207,500.00	$ 189,100.00

Working 1
Booth
Taxable Income	550,000.00
Less Deductions	-
Taxable Income	550,000.00
Tax Rate	21%
Tax Liability	115,500.00
Working 2
Booth
Taxable Income	550,000.00
Less Deductions	(460,000.00)
Taxable Income	90,000.00
Tax Rate	21%
Tax Liabilty	18,900.00

Working 3
Ralph
Qualified Dividend	460,000.00
Tax Rate	20%
Tax Liability	92,000.00
Working 4
Ralph
Salary	460,000.00
marginal tax rate	37%
Tax Liability	170,200.00