Mabel and Alan recently acquired a fast-food franchise. They have a substantial amount of income from sources other than the business and are in the 37% tax bracket. In 2019, each of them worked in the business and received a salary of $50,000. Wages paid to other employees totaled $75,000 and the unadjusted basis of the business property was $2 million. The annual profit of the business, after deducting salaries and wages, was $500,000.

a.Assume the franchise operates as a C corporation.

a.Calculate the tax liability of the corporation.

b.Calculate the tax liability for Mabel and Alan on the income derived from the business. In addition to the salaries they receive, the corporation pays them a dividend equal to the after-tax profit of the business.

b.Calculate the tax liability on their business-related income assuming the franchise operates as an S corporation and there are no separately stated items. Include the QBI deduction when calculating the tax liability on the S corporation ordinary income. When calculating the QBI deduction, assume they have Modified Taxable Income totaling $2 million.