Problem: Module $9$ Textbook Problem $8$

Learning Objectives:

$9-4$ Explain tax and nontax considerations in choosing a passthrough entity form

$9-6$ Explain why individuals once again can use corporations as tax shelters

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 $$320,000.$ 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 Tordinary

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$.$