LO.3 Mabel and Alan, who are in the 35% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of $150,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately $400,000. The entity will distribute enough cash each year to Mabel and Alan to cover their Federal income taxes associated with the franchise.

a. What amount will the entity distribute if the franchise operates as a C corporation?

b. What amount will the entity distribute if the franchise operates as an S corporation?

c. What will be the amount of the combined entity/owner tax liability in

(a) and (b)?