For the current year Creative Designs Inc a C corporation re

For the current year, Creative Designs Inc., a C corporation, reports taxable income of $200,000 before paying salary to Ben the sole shareholder of Creative Designs Inc. (CD). Ben\'s marginal tax rate on ordinary income is 33 percent. Compute the following:

a. How much total income tax will Creative Designs and Ben pay on the $200,000 taxable income for the year if CD doesn\'t pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend?

b. How much total income tax will Creative Designs and Ben pay on the $200,000 of income if CD pays Ben a salary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend?

c. What is the overall tax rate without the salary? (round your answer to 1 decimal place)

d. What is the overall tax rate with the salary? (round your answer to 1 decimal place)

Solution

A) Income tax payable by Craetive designs = 200,000 * 33% = 66,000

After income distributed to Ben, Ben needs to file this income in Shedule K1 of his form of 134,000

B) Income tax payable by Creative Designs = (200,000 - 100,000)*33% = 33,000

Divdend paid to Ben , BEn needs to mention this SHedule K1 of his return

For salary, Ben needs to pay Tax as per the applicable slab rate to him.

C) Overall tax rate = 48%.