Mr. Lion, who is in the 37 percent tax bracket, is the sole shareholder of Toto Inc., which manufactures greeting cards. Toto's average annual net profit (before deduction of Mr. Lion's salary) is $250,000. For each of the following cases, compute the income tax burden on this profit. Assume that all dividends are taxed to individuals at a 20% tax rate. (Ignore any payroll tax consequences.) Required: a. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto pays no dividends. b. Toto is a C Corporation subject to a 21% tax rate. Mr. Lion's salary is $100,000, and Toto distributes its after-tax income as a dividend. c. Toto is an S corporation. Mr. Lion's salary is $100,000, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. d. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes no cash distributions. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. e. Toto is an S corporation. Mr. Lion draws no salary, and Toto makes cash distributions of all its income to Mr. Lion. Assume Toto's ordinary income qualifies for the 20 percent QBI deduction, subject to no limitations. Amount a. Income tax burden on this profit b. Income tax burden on this profit c. Income tax burden on this profit d. Income tax burden on this profit e. Income tax burden on this profit Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been generating net taxable profits of $63,000 per year, before considering the QBI deduction. As a sole proprietor, Megan qualifies for the 20 percent deduction, reducing taxable income from the business to $50,400. Required: a. Assume that Megan's marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this business. Should Megan consider incorporating and operating the business through a C corporation? Assume that C Corporations are subject to a 21% tax rate. Fill the below table to justify your answers. (Ignore any payroll or self-employment tax considerations.) Income tax liability if operated as a C corporation Income tax savings Should Megan consider incorporating and operating the business through a C corporation? per year b. How would your conclusion in part a change if Megan's marginal tax rate were only 28 percent? Annual tax savings will to
