Q. Please write the following: A. The 15% rate for the two penalty taxes on accu
ID: 2579701 • Letter: Q
Question
Q. Please write the following:
A. The 15% rate for the two penalty taxes on accumulated corporate earnings equals the 15% preferential rate that would apply if the earnings were distributed as taxable dividends to individual shareholders. Thus, the penalty taxes replicate the shareholder level tax and negate any tax advantage of accumulating corporate income to avoid such tax.
Do you think this will be repealed by the new tax law?
B. Is any S-Corp income subject to self-employment tax? Why or why not?
Explanation / Answer
Penalty tax or IAET ( Improper Accumulated Earnings Tax) is levied on coporations to discourage tax avoidance through surplus accumulation. its highly improbable that New tax law would not repeal such tax. However, New tax law may contain a provision to allow credit of penalty tax against FWT (Final Witholding Tax) on dividends. as it would appear more equitable on part of stockholder taxpayer.
if the business is organized as S Corp, some income can be classified as salary income and some as distribution. Self employment taxes would be levied on salary portion. This is done to avoid higherhigher social security and medicare taxes collectively know as self employment taxes. Only income designated as salary under S corp is subjec to employment taxes and rest of the distribution income is subject to ordinary income tax.
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