Question

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. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year

Answer 1

$63,325

Step-by-step explanation:

Calculation for how much total combined income tax do White and Nancy pay in the current year

First step is to compute Corporate income tax

Since The Corporation is a personal service corporation which means that 35% flat tax rate will be applies to the Corporation taxable income which is calculated as:

Corporate income tax=($320,000-$100,000-$150,000)*35%

Corporate income tax=$70,000*35%

Corporate income tax=$24,500

Second step is to find the after-tax income that was distributed to Nancy

After-tax income = ($70,000 – $24,500)

After-tax income=$45,500

Third step is to compute for the income tax incur by Nancy on the salary income and on the dividend income

Income tax on salary income=($100,000×32%)

Income tax on salary income=$32,000

Income tax on dividend income=($45,500 ×15%)

Income tax on dividend income= $6,825

Total tax=$32,000+$6,825

Total tax=$38,825

Last step is to compute the total combined income tax

Total combined income tax =$24,500+$38,825

Total combined income tax= $63,325

Therefore the total combined income tax that White and Nancy pay in the current year will be $63,325