Eliza Eastwood owns a very successful lodging chain. The chain is incorpo- rated and earns net income of $300,000 each year. Her salary is $80,000 a year. At the present time, she receives fringe benefits worth $10,000. The lodging chain pays her dividends equal to 40% of its net income. The corporation income tax rates are as follows:

Taxable Income Over Not Over Rate

$0 $200,000 15%

$200,000 $350,000 25%

$350,000 35%

Assume Eastwood’s average tax rate is 35% on all her taxable income.

Eliza is an excellent owner/manager but weak in taxation. At a conference for entrepreneurs, she recently heard about “S Corporations,” double taxation, excessive salary being labeled as dividends by the IRS, etc. She is the sole owner of her business and insists the business retain its corporate form; however, she desires to minimize taxes.

Required:
1. Using the information above, calculate the income taxes paid by her corporation and by her (ignore deductions, exemptions, etc., in calculating her personal income taxes).
2. How would you advise her to minimize the taxes she and her corporation pay? (Consider dividends would have to be at least equal to 10% of net income [unless the company files as an “S Corporation”]) and the allowable fringe benefits maximum should be assumed to cost no more than $15,000. (Anything in excess of $15,000 should be considered salary.)
Further, consider the maximum salary allowable by the IRS (if her corporation files as a C Corporation) is $150,000 in total. She desires to continue receiving $210,000 annually in fringes, salary, and dividends.
3. According to your advice, what is the change in the total taxes?