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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

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.

Remember that a shareholder is taxed on S corporation income whether withdrawn or not and is not taxed on the actual withdrawals or distributions.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

Fill in this box:

Lilianna:

SOLE C CORP W/ SALARY C CORP W/ DIVIDEND S CORP W/ SALARY S CORP W/ DIVIDEND

Pass-through income

Qualified business income deduction

Salary income

Dividend income

Total income to Lilianna

Lilianna's tax

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