Moana is a single taxpayer who operates a sole proprietorship. She expects her t
ID: 2493125 • Letter: M
Question
Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. (Use the tax rate schedule and corporate income tax brackets).
Using the single individual tax brackets and the corporate tax brackets, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues).
How much income should be left in the corporation?
Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. (Use the tax rate schedule and corporate income tax brackets).
2015 tax rate schedule INSERT1 Schedule X- Single Schedule Z-Head of Household If taxable income 3 over. If taxable income i Butnot over Butnot over The tax is 10% of taxable income $922.50 plus 15% of the excess over $9,225 $5,156.25 plus 25% of the excess over $37,450 $18,481.25 plus 28% of the excess over $90,750 $46,075. 25plus 33% of the excess over $189,300 $119,401.25 plus 35% of the excess over $411,500 $119,996.25 plus 39.6% of the excess over $413,200 The tax is 10% of taxable income $1,315.00 plus 15% of the excess over $13,150 $6,872.50 plus 25% of the excess over $50,200 $26,722.50 plus 28% of the excess over $129,600 $49,192.50 plus 33% of the excess over $209,850 $115,737.00 plus 35% of the excess over $411,500 $125,362.00 plus 39.6% of the excess over $439,000 over SO 9,225 S37,450 90,750 S189.300 $411,500 $413,200 S37,450 $90.750 | S 189.300 | S41 1,500 | $13,150 S50-200 | $129,600 $209.850 | S41 1,500 $439,000 $13,150 S129.600 $209,850 $411,500 S439,000 S41 3.200 Schedule Y-1-Married Fil intly of Qualifying Widower) Schedule Y-2- Married Filing Separatel If taxable income 3 over. If taxable income is But not over But not over The tax is 10% of taxable income $1,845.00 plus 15% of the excess over $18,450 $10,312.50 plus 25% of the excess over $74,900 $29,387.50 plus 28% of the excess over $151,200 $51,577.50plus 33% of the excess over $230,450 $111,324.00 plus 35% of the excess over $411,500 $129,996.50 plus 39.6% of the excess over $464,850 The tax is 10% of taxable income $922.50 plus 15% of the excess over $9,225 $5,156.25 plus 25% of the excess over $37,450 $14,693.75 plus 28% of the excess over $75,600 S25,788.75plus 33% of the excess over $115,225 $55,662.00 plus 35% of the excess over $205,750 $64,998.25 plus 39.6% of the excess over $232,425 over S0 S18,450 $74,900 151,200 S18,450 $74.900 | 9.225 S37,450 S 75.600 | S0 S37,450 575,600 $115,225 $205.750 S232,425 $151 $115 $230,450 | S41 1,500 $464.850 S205.750 | $232,425 | $411,500 5464,850Explanation / Answer
First of all comparing the single individual and corporate tax rate to minimise the income tax. Moana has $50,000 of taxable income not related to her sole proprietorship, she is currently in the 25 percent tax bracket (25% of the excess over $37,450). The task is to allocate the $200,000 between Moana and her corporation to minimize her Income tax liability. The corporate tax rate is 15 percent (taxable income < $50,000) and this is lower than Moana’s marginal tax rate of 25 percent. To take advantage of the 15 percent corporate tax bracket, $50,000 of the expected $200,000 in profits should be retained in the corporation.
2. Moana’s choice is to have income taxed at 25 percent (the corporation’s marginal tax rate) or 25 percent (Moana’s marginal tax rate). Assuming Moana prefers to receive the profits personally. the next $37,450 of the expected $200,000 in profits should be shifted to Moana.
$25,000 of the remaining $112550 of profits should be retained by the corporation, and the rest ($87,550) should be shifted to Moana.
In summary, $75,000 of the expected profits are retained in the corporation and $125,000 of the profits are shifted to Moana