Moana is a single taxpayer who operates a sole proprietorship. she expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. moana is contemplating incorporating her sole proprietorship. (use the tax rate schedule and corporate income tax brackets).
a. using the single individual tax brackets and the corporate tax brackets, find out how much current tax this strategy could save moana (ignore any social security, medicare, or self-employment tax issues). (round your intermediate calculations and final answer to nearest whole dollar amount.)

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rachylt3345 rachylt3345

07-09-2017
Business

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Moana is a single taxpayer who operates a sole proprietorship. she expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. moana is contemplating incorporating her sole proprietorship. (use the tax rate schedule and corporate income tax brackets).
a. using the single individual tax brackets and the corporate tax brackets, find out how much current tax this strategy could save moana (ignore any social security, medicare, or self-employment tax issues). (round your intermediate calculations and final answer to nearest whole dollar amount.)

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meerkat18 meerkat18 · Answer 1 · 2017-09-20T08:04:44+02:00

Using the single individual tax brackets, Moana's taxable income ($250,000) falls in the fifth bracket where taxable income is over $186,350 but not over $405,100. This means that she needs to pay $45,353.75 plus 10% of the amount in over $186,350. Computing the tax of Moana, you can get $51,718.75 (($45,353.75 x 10%($250,000 - $183,650)). If she uses the corporate tax brackets, her taxable income ($200,000) falls in the fourth bracket where taxable income is between $100,000 and $335,000. This means that she needs to pay $22,250 + 39% of the amount over 100,000. Computing the tax of Moana, you can get $61,250 (($22,250 x 39%($200,000 - $100,000)). She should not incorporate her sole proprietorship because it will only make her pay more taxes. The tax savings she can have if she does not incorporate her business is $9,531 ($61,250 - $51,718.75).