Mabel and Alan, who are in the 35% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately $450,000. The entity will distribute enough cash each year to Mabel and Alan to cover their Federal income taxes associated with any flow-through income from the franchise.
a. What amount will the entity distribute if the franchise operates as a C corporation?
b. What amount will the entity distribute if the franchise operates as an S corporation?
c. What will be the amount of the combined entity/owner tax liability in (a) and (b)?