12,875 Assignment Problem 2:

Still working on the publication you have been asked to calculate the small business deduction and then explain how it works.

(1) What is the purpose behind the small business deduction?

(2) Is this deduction a savings or a deferral? Explain

(3) The purpose behind the components of the calculation.

(4) The purpose behind the associated company rules.

(5) If income is over the annual business limit should the company declare a bonus to reduce the income back down to the annual business limit?

Your calculations should use the following assumptions:

• Active business income..........................................................$600,000
• Taxable income.......................................................................$300,000
• Business limit..........................................................................$200,000
• Personal marginal tax rate on employment income................. 50%
• Personal marginal tax rate on eligible dividends..................... 31%
• Personal marginal tax rate on non-eligible dividends.............. 42%

Compare the after-tax personal cash from the following:

1. Calculate the amount of bonus needed to reduce taxable income to the point where all of the taxable income is eligible for the small business deduction.
2. Assuming that the bonus is declared and paid, calculate the personal tax on the bonus received by the individual and their after-tax cash.
3. Assuming that the bonus is not declared, the calculate the amount of corporate tax the company will pay on the amount of the bonus identified in step 1. Then calculate the corporate after-tax cash on this bonus amount not paid. Pay this after-tax cahs as a dividend and calculate the amount of personal tax on this dividend and their after-tax cash.