Question

In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 37% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the deduction for qualified business income and the 3.8% Medicare surtax on net investment income.) The rates on qualified dividends are 0%, 15% and 20%. If an amount is zero, enter "0".
a. Azure is a C corporation and pays no dividends or salary to Sasha. 350,000 and corporate income tax of $ 119,000 x . Sasha Azure Company, as a C corporation, has taxable income of $ has taxable income of $ 119,000 X from Azure. Feedback
b. Azure is a C corporation and distributes $75,000 of dividends to Sasha. and corporate income tax of $ . Sasha incurs income tax of Azure Company has taxable income of $ with respect to the dividends. Feedback c. Azure is a C corporation and pays $75,000 of salary to Sasha. (Ignore payroll taxes.)
c. Azure is a C corporation and pays $75,000 of salary to Sasha. (Ignore payroll taxes.) The salary paid to Sasha corporate income tax of sl the year. deductible by Azure Company resulting in taxable income of and . Sasha incurs income tax of $ with respect to the salary she received during Feedback
d. Azure is a sole proprietorship, and Sasha withdraws $0. (Ignore self-employment taxes.) There is no Federal income tax applicable to businesses formed as sole proprietorships. Sasha incurs income tax of with respect to Azure Company. Feedback
e. Azure is a sole proprietorship, and Sasha withdraws $75,000. (Ignore self-employment taxes.) There is no Federal income tax applicable to businesses formed as sole proprietorships. Sasha will Azure Company, regardless of the amount she withdraws.

Answer 1

Answer:

Answer is explained in the explanation section below.

Explanation:

A) No dividends or salary to Sasha:

If no dividends or salary then no net income, hence, no taxable amount.  

Company has the taxable income of $350,000.

Corporate tax will be computed by reducing the threshold limit from the taxable income according to the rules of income tax and then tax rate will be applied.

b) Distributes $75000 of dividends to Sasha.

Now, it has got the dividend, now the amount is taxable. It will be taxed on every dividend that Sasha will get during each year.

c) Pays $75000 salary to Sasha:

Now, the Sasha is getting Salary of $75000, it means the total taxable amount of $350,000 will be reduced by the amount of Salary that Sasha is receiving. Now, the balance taxable amount = $350,000 - $75000 = $275000

Amount that Sasha is liable to pay as a tax = $75000 x  39.6% = $29700

So, $29700 is the amount that Sasha will pay as tax for getting her salary of $75000

d) Sole proprietorship and Sasha Withdraws nothing:

In this case, taxable income of Sasha is the profit of the company Azure,

So,

Tax payable = $350,000 x 39.6% = $138,600

e) Sole proprietorship and Sasha Withdraws $75000:

Even in this case, Sasha is liable to pay the tax.

Tax payable = $350,000 x 39.6% = $138,600