This letter is in response to your inquiry as to the tax effects of incorporating your business in 2021. I have analyzed the tax results under both assumptions, proprietorship and corporation. I cannot give you a recommendation until we discuss the matter further and you provide me with some additional information. My analysis based on information you have given me to date is presented below.

Computation 1

Total tax on $150,000 if you continue as a proprietorship:

Total tax if you incorporate:

Individual tax on $100,000 salary

Corporate tax on taxable income

Total

Although this analysis appears to favor ______, it is important to consider that there _______be additional tax on the ______ of income left in the corporation if you withdraw that amount as a dividend in the future, as calculated below.

Computation 2

After-tax income left in corporation

Tax on after-tax income

Total tax paid if you incorporate

Comparison of computations 1 and 2 appears _____ incorporating. If you incorporate and recover the income left in the corporation as long-term capital gain from a sale of stock in the future, the total tax cost of incorporating will be the same, as shown in computation 3 below.

Computation 3

After-tax income left in corporation

Tax on after-tax income

Total tax paid if you incorporate

In summary, _______appears to be the more attractive option. However, there are important nontax considerations with respect to this decision. We can discuss those issues at our next meeting. Thank you for consulting my firm on this important decision. We are pleased to provide analyses that will help you make the right choice. Sincerely, Jon Thomas, CPA