Lilianna, a single taxpayer, operates a coffee shop. She is considering either continuing the business as a sole proprietorship or reorganizing it as either a C corporation or an S corporation. Her goal is to withdraw $16,000 of profits from the business annually while minimizing her total tax liability. She expects the business to generate annually $47,000 of taxable income, all of which qualifies as pass-through income before considering a deductible salary expense.

TAXATION : Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions. Assume the C corporation is in the 21% corporate tax bracket, Lilianna is in the 22% individual tax bracket for ordinary income, and Lilianna is taxed at 15% on dividend income. When considering either corporate option, perform the analysis first by treating any withdrawals as deductible salary payments of the corporation. Then do the analysis by treating them as nondeductible dividends or distributions. Ignore employment taxes.

	Sole		C Corporation		C Corporation		S Corporation		S Corporation
	Proprietorship		with Salary		with Dividend		with Salary		with Distribution
Entity Level:
Income before salary	$47,000		$47,000		$47,000		$47,000		$47,000
Salary deduction	0		(16,000)		0		(16,000)		0
Taxable income	$47,000		$31,000		$47,000		$31,000		$47,000
Entity level tax	$0		$6,510		$9,870		$0		$0

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Lilianna:
Pass-through income
Qualified business income deduction
Salary income
Dividend income
Total income to Lilianna
Lilianna's tax