I2-50 Computation of Tax. Georgia, a single taxpayer, operates a business that produces
$100,000 of income before any amounts are paid to her. She has no dependents and no
other income. She has itemized deductions of $18,000. Compute the total income tax that
would be paid assuming the following additional facts. Ignore payroll taxes.
a. Georgia operates the business as an S corporation receiving a salary from the corporation
of $60,000. The corporation distributes all of its remaining income to the shareholders.
b. She operates the business as a C corporation receiving a salary from the corporation of
$60,000. The corporation distributes its after tax income to her as a dividend.
c. How would the total tax change in each of the first two requirements if the corporation
made no payments to the owner other than the salary?
Georgia a. As an S corp b. As a C corp c. With salary only as a C corp
Salary 60000 60000 60000
Itemized deductions -18000 -18000 -18000
Personal exemption (2006 -3300 -3300 -3300
Taxable income ...
The solution compares the difference in total tax between a 'C' and an 'S' where dividends and/or distributions are paid out. A third part of the solution asks for tax differences if the distributions and/or dividends are not paid out.