Question
Ellie and Jessica are siblings that have started their own business. When they first created their business, they formed an S Corporation. They are considering,
Ellie and Jessica are siblings that have started their own business. When they first created their business, they formed an S Corporation. They are considering, from a tax perspective, how things would look differently if they changed to a C Corporation.
- Ellie owns 35% and Jessica owns 65% of the business. Ellie works full-time at the business and takes a salary of $55,000.
- For 2019, they expect their profits to be $225,000 before paying a salary to Ellie.
- They also plan on taking a $13,000 total distribution (allocated based on ownership percentage).
- For this project, assume that all business transactions are cash transactions.
- All business income of the S Corporation is eligible for Section 199A deduction for Ellie and Jessica.
- Ellie and Jessica also have other sources of income, which you will ignore, except that you need to know that Ellies marginal tax rate is 24% and Jessicas marginal tax rate is 32%.
- You can ignore all self-employment taxes.
C Corporation:
Keep the same fact pattern as above but instead they would receive an ordinary dividend rather than distribution, but amount would be the same.
C Corporation | Ellie | Jessica |
How much cash will each receive from S Corp? | ||
What is the ordinary income on K-1? | ||
What is total income reported on Form 1040? | ||
What is taxable income* on Form 1040? | ||
What is the income tax? | ||
How much cash would be left after paying taxes? |
*you can ignore above the line deductions and standard/itemized deductions
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