Lisa a single taxpayer operates a business that produces 95

Lisa, a single? taxpayer, operates a business that produces

$ 95000 of income before any amounts are paid to her. She has no dependents and no other income. She has itemized deductions of

$16 000.

?(The tax year is 2017?.)

Question:

Compute the total income tax that would be paid assuming the following additional facts. Ignore payroll taxes.

a. Lisa operates the business as an S corporation receiving a salary from the corporation of $66,000.

The corporation distributes all of its remaining income to the shareholders.

b. She operates the business as a C corporation receiving a salary from the corporation of

The corporation distributes its after tax income to her as a dividend.

c. How would the total tax change in each of the first two requirements if the corporation made no payments to the owner other than the? salary?

Solution

a) Since Lisa operates business as S Corporation it has the benefit of Pass through Status and Tax due is paid at the individual level both on Salary and Dividend. Hence Tax to be paid on salary and Dividend after itemized Deductions

b) Since Lisa operates business as C Corporation it has to pay tax on Income distributed to Business owners as Dividend and hence liable to Double Taxation. Individual has to pay tax on Salary component and Dividend even though it is taxed under corporation