Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto Inc., which manufactures greeting cards. Toto's average annual net profit (before deduction of Mr. Lion's salary) is $370,000. For each of the following cases, compute the income tax burden on this profit. Assume that all dividends are taxed to individuals at a 20% tax rate. (Ignore any payroll tax consequences.) Required: a. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto pays no dividends. b. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto distributes its after-tax income as a dividend. c. Toto is an S corporation. Mr. Lion's salary is $100,000, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations.
Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto Inc., which manufactures greeting cards. Toto's average annual net profit (before deduction of Mr. Lion's salary) is $370,000. For each of the following cases, compute the income tax burden on this profit. Assume that all dividends are taxed to individuals at a 20% tax rate. (Ignore any payroll tax consequences.) Required: a. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto pays no dividends. b. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto distributes its after-tax income as a dividend. c. Toto is an S corporation. Mr. Lion's salary is $100,000, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Problem: Module 9 Textbook Problem 8
Learning Objectives:
• 9-4 Explain tax and nontax considerations in choosing a passthrough entity form
• 9-6 Explain why individuals once again can use corporations as tax shelters
Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto Inc., which
manufactures greeting cards. Toto's average annual net profit (before deduction of Mr. Lion's
salary) is $370,000. For each of the following cases, compute the income tax burden on this
profit. Assume that all dividends are taxed to individuals at a 20% tax rate. (Ignore any payroll tax
consequences.)
Required:
a. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto pays
no dividends.
b. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto
distributes its after-tax income as a dividend.
c. Toto is an S corporation. Mr. Lion's salary is $100,000, and Toto makes no cash distributions.
Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no
limitations.
d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions.
Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no
limitations.
e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its
income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction,
subject to no limitations.
a. Income tax burden on this profit
b. Income tax burden on this profit
c. Income tax burden on this profit
d. Income tax burden on this profit
e. Income tax burden on this profit
$
Amount
156,600
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