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Determine the tax liabilities of a C Corporation vs a S Corporation with one shareholder who owns 100% of the company's stock.
Carl Carlson, a single taxpayer, owns 100% of Delta Corporation. During 2009, Delta reports $150,000 of taxable income. Carl reports no income other than that earned from Delta, and Carl claims standard deductions.
a. What is Delta's income tax liability assuming that Carl withdrawals none of the earnings from the C Corporation? What is Carl's income tax liability? What is the total tax liability for the corporation and its shareholder?
b. Assume that Delta instead distributes$80,000 of its after-tax earnings to Carl as a dividend in the current year. What is the total income tax liability for the C Corporation and its shareholder?
c. How would your answer to Part a change if Carl withdrew $80,000 from the business in salary? Assume the corporation pays $6000 of Social Security taxes on the salary, which it can deduct from the $150,000 taxable income amount in Part a. Carl also pays $6000 of Social Security taxes on the salary, which he cannot deduct.
d. How would your answers to Parts a-c change if Delta were instead an S Corporation?
Delta's income tax liability = $150,000 x 39% = $58,500
However, since Carl didn't withdraw any of the earnings which means there was no dividend distribution and that he doesn't draw any salary from Delta, then
Carl's income tax liability = $0
Total tax liability for the corporation and shareholder = $58,500 + ...
This solution assists with determining tax liabilities and compare entity forms.