Question

Purple Company has $200,000 in net income for 2022 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single and she claims the $12,950 standard deduction for 2022 (she has no other deductions). Purple Company is Kirsten's only source of income.

Ignoring any employment tax considerations, compute Kirsten's after-tax income for each of the following situations.
Click here to access the 2022 individual tax rate schedule to use for this problem. Assume the corporate tax rate is 21%.
When required, carryout intermediate tax computations to the nearest cent and then round your final tax liabily to the nearest dollar.
Purple Company is a proprietorship and Kirsten withdraws $50,000 from the business during the year; Kirsten claims a $37,410 deduction for qualified business income. Kirsten's taxable income is $✓, and her after-tax income is $ Feedback Check My Work Business operations can be conducted in a number of different forms. Among the various possibilities are the following: Sole proprietorships; Partnerships; Trusts and estates; S corporations; Regular corporations and Limited liability companies. For Federal income tax purposes, the distinctions among these forms of business organization are very important.

Answer 1

Kirsten's taxable income is computed by subtracting her business withdrawal and qualified business income deduction from the net income of Purple Company, and then subtracting her standard deduction. Her after-tax income is then calculated by applying the appropriate individual tax rates to her taxable income.

Step-by-step explanation:

Taxable and After-Tax Income Calculation:

To calculate Kirsten's taxable income and after-tax income, we follow a step-by-step process with her financial details provided from Purple Company's earnings as a proprietorship: Start with the net income of Purple Company which is $200,000. Since Kirsten withdraws $50,000, this is her gross income from the business. Kirsten claims a qualified business income deduction (QBI) of $37,410.

Her adjusted gross income (AGI) is therefore $200,000 - $50,000 + $37,410 = $187,410. Subtract the standard deduction of $12,950 from the AGI to get the taxable income: $187,410 - $12,950 = $174,460. Using the 2022 individual tax brackets, calculate the federal income tax due to arrive at the after-tax income. For illustrative purposes, the specific tax amounts are dependent on the progressive tax brackets and therefore the detailed calculation has been omitted. However, once the tax is calculated and deducted from Kirsten's AGI, we get her after-tax income.