Kate Brown has operated her small repair shop as a sole proprietorship for sever

Question

Kate Brown has operated her small repair shop as a sole proprietorship for several years, but projected changes in her business's income have led to consider incorporating. Kate is married and has two children. Her family's only income, her annual salary of $55,000, comes from operating the business. (The business actually earns more than $55,000, but Kate reinvests the additonal earnings into the business.) She itemizes deductions, and she is able to deduct $19,500. These deductions combind with her four personal exemptions for 4 X $3,500 = $14,000. Of course, her actual taxable income if she does not incorporate, would be higher by the amount of reinvested income. Kate estimates that her business earnings before salary and taxes for the period 2010 and 2011 will be as follows:

What would Brown's total taxes (corporate plus personal) be in each year under:

1) A corporation? (2010 tax = $7,672.50)

2) A proprietorship? (2010 tax = $7,672.50)

Year Earnings before Salary and Taxes 2010                        90,000 2011                      120,000 2012                      150,000

Explanation / Answer

2010 advantage as a corporation = $ 0

2011 advantage = $ 170

2012 advantage = - $ 1,630

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