1.) For the current year, Maple Corporation, a C corporation, reports taxable in

ID: 2523565 • Letter: 1

Question

1.)

For the current year, Maple Corporation, a C corporation, reports taxable income of $245,000 before paying salary to its sole shareholder, Diane. Diane’s marginal tax rate on ordinary income is 35.9 percent (including the additional Medicare tax) and 18.8 percent on dividend income (including the 3.8% net investment income tax). If Maple pays Diane a salary of $161,000 but the IRS determines that Diane’s salary in excess of $125,000 is unreasonable compensation, what is the amount of the overall tax (corporate level + shareholder level) on Maple’s $245,000 pre-salary income? Assume Maple’s tax rate is 35 percent and it distributes all after-tax earnings to Diane. (Round your intermediate calculations and final answers to the nearest whole dollar amount.)

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Sandy Corp. projects that it will have taxable income of $116,000 for the year before paying any fringe benefits. Assume Karen, Sandy’s sole shareholder, has a marginal tax rate of 35 percent on ordinary income and 15 percent on dividend income. Assume Sandy’s tax rate is 35 percent.

a. What is the amount of the overall tax (corporate level + shareholder level) on Sandy’s $116,000 of pre-benefit income if Sandy Corp. does not pay out any fringe benefits and distributes all of its after-tax earnings to Karen (ignore the net investment income tax)?

b. What is the amount of the overall tax on Sandy’s $116,000 of pre-benefit income if Sandy Corp. pays Karen’s adoption expenses of $10,000 and the payment is considered to be a nontaxable fringe benefit (ignore the net investment income tax)? Sandy Corp. distributes all of its after-tax earnings to Karen.

c. What is the amount of the overall tax on Sandy’s $116,000 of pre-benefit income if Sandy Corp. pays Karen’s adoption expenses of $10,000 and the payment is considered to be a taxable fringe benefit (ignore the net investment income tax and the additional Medicare tax)? Sandy Corp. distributes all of its after-tax earnings to Karen.

Explanation / Answer

With $125000 Salary

Description

(1)Taxable income before salary

$245000

(2) Salary

125000

(3) Taxable Income

120000

(1)-(2)

(4) Entity Tax

42000

(3) x 35%

(5)

78000

(3)-(4)

(6)

14664

(5) x 18.8%

(7)

44875

(2) x 35.9%

Overall Tax

101539

(4)+(6)+(7)

In calculating the overall tax on Maple Corp’s pre-salary taxable income, the $125000 amount the IRS will allow Maple to deduct is taken into account rather than the $161000 amount it would prefer to deduct.