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Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $450,000, of which $250,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. (Use the tax rate schedule.) a. Using the married-joint tax brackets and the corporate tax rate, find out how much current tax this strategy could save Orie and Jane. (Round your intermediate calculations and final answer to nearest whole dollar amount.)

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jepessoa

Answer:

Total savings = $361,341 - $342,910 = $18,431, but $197,500 must be left in the corporation.

Explanation:

using the 2020 tax schedule, their current tax liability is:

$94,735 + [35% x ($450,000 - $414,700)] = $107,090

after tax income = $450,000 - $107,090 = $342,910

if we consider the business a corporation:

$250,000 x 21% = $52,500

after tax income = $197,500

plus the $200,000 in ordinary income:

$29,211 + [24% x ($200,000 - $171,050)] = $36,159

after tax income = $163,841

total after tax income = $197,500 + $163,841 = $361,341

Total savings = $361,341 - $342,910 = $18,431, but $197,500 must be left in the corporation.

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