Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000.

Nancy is trying to decide whether to take a salary of $125,000 or a dividend of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket irrespective of any income from White.

Use the information above to answer the following (ignore any employment tax considerations.)

1. Taking only Nancys personal perspective into account, would Nancy prefer a salary or dividend? Why?

2. Taking only White Corporations perspective into account, would White prefer to pay Nancy a salary or dividend? Why?

3. What is your recommendation to Nancy and White together (salary or dividend)? Why?