| Several years ago, Brian formed Sigma Corporation, a retail company. Sigma uses the accrual |
| method of accounting. In the current year, the corporation reported the following items: |
| Gross profit | | | | | $290,000 |
| Long-term capital gain | | | | | 30,000 |
| Tax-exempt interest received | | | | | 7,000 |
| Salary paid to Brian | | | | | 80,000 |
| Payroll tax on Brian’s salary (Sigma’s share) | | | | | 6,120 |
| Depreciation | | | | | 25,000 | ($21,000 for E&P purposes) |
| Other operating expenses | | | | | 89,000 |
| Dividend distribution to Brian | | | | | 60,000 |
| In addition to owning 100% of Sigma’s stock, Brian manages Sigma’s business and earns |
| the $80,000 salary listed above. This salary is an ordinary and necessary business expense |
| of the corporation and is reasonable in amount. The payroll tax on Brian’s $80,000 salary |
| is $12,240, $6,120 of which Sigma pays and deducts, and the other $6,120 of which |
| Brian pays through Social Security withholding. Brian is single with no dependents and |
| claims the standard deduction. |
| a. Calculate Sigma’s and Brian’s current year taxable income and total tax liability, as |
| well as their combined tax liability. Also, calculate the corporation’s current E&P after |
| the dividend distribution. |
| b. Assume instead that Brian operates Sigma as a sole proprietorship. In the current |
| year, the business reports the same operating results as above, and Brian withdraws |
| $140,000 in lieu of the salary and dividend. Brian’s self-employment tax is $20,486. |
| Compute Brian’s total tax liability for the current year, assuming that he claims a |
| $35,200 qualified business income deduction. |
| c. Assume a C corporation such as in Part a distributes all of its after-tax earnings. |
| Compare the tax treatment of long-term capital gains, tax-exempt interest, and operating |
| profits if earned by a C corporation with the tax treatment of these items if earned |
| by a sole proprietorship. |
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AskedC4-58.xlsx
