Phillip Zodrow owns and operates a small unincorporated plumbing service business, Zodrow Plumbing Service (ZPS). Phillip is married and has two children, so he claims four exemptions on his tax return. As business grows steadily, tax considerations are important to him. Therefore, Phillip is considering incorporation of the business. Under either form of the business (corporation or sole ownership), the family will initially own 100% of the firm. Phillip plans to finance the firm€™s expected growth by drawing a salary just sufficient for his family€™s living expenses and by retaining all other income in the business. He estimates the income and expenses over the next three years to be as follows:

Which form of business (corporation or sole ownership) will allow Phillip to pay the lowest taxes (and retain the most income) during the three years? Personal income€tax brackets and amounts of personal exemption are updated yearly, so you need to consult the IRS tax manual for the tax rates, as well as for the exemptions, that are applicable to the tax years.

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Year 1 $200,000 Year 2 Year 3 $230,000 |Gross income $215,000 $110,000 Salary Business expenses Personal exemptions Itemized deductions $100,000 $25,000 $120,000 $40,000 $30,000 $14,800 $14,800 $20,000 $14,800 $16,000 $18,000