Problem: Module 9 Textbook Problem 9 Learning Objective: 9-6 Explain why individuals once again can use corporations as tax shelters Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been generating net taxable profits of $51,000 per year, before considering the QBI deduction. As a sole proprietor, Megan qualifies for the 20 percent deduction, reducing taxable income from the business to $40,800. Required: a. Assume that Megan's marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this business. Should Megan consider incorporating and operating the business through a C corporation? Assume that C Corporations are subject to a 21% tax rate. Fill the below table to justify your answers. (Ignore any payroll or self-employment tax considerations.) Answer is complete but not entirely correct. Income tax liability if operated as a C corporation Income tax savings Should Megan consider incorporating and operating the business through a C corporation? $10,710 $ 11,424 Yes per year
Problem: Module 9 Textbook Problem 9 Learning Objective: 9-6 Explain why individuals once again can use corporations as tax shelters Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been generating net taxable profits of $51,000 per year, before considering the QBI deduction. As a sole proprietor, Megan qualifies for the 20 percent deduction, reducing taxable income from the business to $40,800. Required: a. Assume that Megan's marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this business. Should Megan consider incorporating and operating the business through a C corporation? Assume that C Corporations are subject to a 21% tax rate. Fill the below table to justify your answers. (Ignore any payroll or self-employment tax considerations.) Answer is complete but not entirely correct. Income tax liability if operated as a C corporation Income tax savings Should Megan consider incorporating and operating the business through a C corporation? $10,710 $ 11,424 Yes per year
Chapter3: Organizing And Financing A New Venture
Section: Chapter Questions
Problem 2EP
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Transcribed Image Text:Problem: Module 9 Textbook Problem 9
Learning Objective: 9-6 Explain why individuals once again can use corporations as tax shelters
Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the
business, and provides supplies and equipment. The business has been generating net taxable profits of $51,000 per year, before
considering the QBI deduction. As a sole proprietor, Megan qualifies for the 20 percent deduction, reducing taxable income from the
business to $40,800.
Required:
a. Assume that Megan's marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this
business. Should Megan consider incorporating and operating the business through a C corporation? Assume that C Corporations are
subject to a 21 % tax rate. Fill the below table to justify your answers. (Ignore any payroll or self-employment tax considerations.)
Answer is complete but not entirely correct.
Income tax liability if operated as a C corporation
Income tax savings
Should Megan consider incorporating and operating the business through a C corporation?
$10,710
$ 11,424 per year
Yes
Transcribed Image Text:b. How would your conclusion in part a change if Megan's marginal tax rate were only 28 percent?
Answer is complete but not entirely correct.
decrease
to $
Annual tax savings
will
1,571
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