Vera Van Wormer owns a very successful food service chain. The chain is incorporated and generates net income of $300,000 each year. Her salary is $40,000 a year, and she receives no benefits. The food service chain pays her dividends equal to 40% of its net income each year. Vera’s average tax rate on all taxable income is 28%. Assume the corporate income tax rates are as follows:

Taxable Income Tax Rate

$0-$50,000 15%

$50,001-$75,000 $7,500 + 25% of the amount over $50,000 over $75,000 $13,750 + 34% of the amount over $75,000 Vera is an excellent owner-manager, but does not know much about taxes. At a recent conference for entrepreneurs, she heard about S corporations, dou- ble taxation, excessive salary being considered dividends, and other related matters. She is the sole owner of her business and insists that the business retain its corporate form; however, she wants to minimize taxes. For simplicity, assume dividends are taxed at ordinary rates.

Requtred:

1. Based on the above information, calculate the income taxes paid by the corporation and Vera (ignore deductions and exemptions in calculating her personal income taxes).

2. How would you advise Vera to minimize her taxes? Consider that the minimum dividends would have to be 12% of net income and the maxi- mum salary could be $100,000. The maximum benefits would cost $20,000. Assume that these fringe benefits are deductible to the corporation and non-taxable to Vera. She still wants to receive salary, dividends, and fringe benefits totaling $160,000.

3. Based on your advice, what would be the tax reduction?