Question 2: Form of Business Kate Brown has operated her small repair shop as a sole proprietorship for several years, but projected changes in her business's income have led her to consider incorporating. Kate is married and has two children. Her family's only income, her annual salary of $60,000, comes from operating the business. (The business actually earns more than $60,000, but Kate reinvests the additional earnings in the business.) She itemizes deductions, and she is able to deduct $19,500. These deductions, combined with her four personal exemptions for 4*$3,950=$15,800, give her a personal taxable income of $24,700-$60,000 - $19,500 - $15,800. Of course, her actual taxable income, if she does not incorporate, would be higher by the amount of reinvested income. Kate estimates that her business earnings before salary and taxes for the period 2016 to 2018 will be as follows: Earnings Before Year Salary and Taxes 2016 $ 90,000 2017 120,000 2018 150,000 25 23 a. What would Brown's total taxes (corporate plus personal) be in each year under (1) A corporation? (2016 tax-$7,297.50) (2) A proprietorship? (2016 tax=$7,297.50) b. Should Brown incorporate? Discuss.
Question 2: Form of Business Kate Brown has operated her small repair shop as a sole proprietorship for several years, but projected changes in her business's income have led her to consider incorporating. Kate is married and has two children. Her family's only income, her annual salary of $60,000, comes from operating the business. (The business actually earns more than $60,000, but Kate reinvests the additional earnings in the business.) She itemizes deductions, and she is able to deduct $19,500. These deductions, combined with her four personal exemptions for 4*$3,950=$15,800, give her a personal taxable income of $24,700-$60,000 - $19,500 - $15,800. Of course, her actual taxable income, if she does not incorporate, would be higher by the amount of reinvested income. Kate estimates that her business earnings before salary and taxes for the period 2016 to 2018 will be as follows: Earnings Before Year Salary and Taxes 2016 $ 90,000 2017 120,000 2018 150,000 25 23 a. What would Brown's total taxes (corporate plus personal) be in each year under (1) A corporation? (2016 tax-$7,297.50) (2) A proprietorship? (2016 tax=$7,297.50) b. Should Brown incorporate? Discuss.
Chapter13: Choice Of Business Entity—general Tax And Nontax Factors/formation
Section: Chapter Questions
Problem 37P
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Transcribed Image Text:Question 2: Form of Business
Kate Brown has operated her small repair shop as a sole proprietorship for several years,
but projected changes in her business's income have led her to consider incorporating. Kate is
married and has two children. Her family's only income, her annual salary of $60,000, comes
from operating the business. (The business actually earns more than $60,000, but Kate reinvests
the additional earnings in the business.) She itemizes deductions, and she is able to deduct
$19,500. These deductions, combined with her four personal exemptions for 4*$3,950=$15,800,
give her a personal taxable income of $24,700-$60,000 - $19,500 - $15,800.
Of course, her actual taxable income, if she does not incorporate, would be higher by the
amount of reinvested income. Kate estimates that her business earnings before salary and taxes
for the period 2016 to 2018 will be as follows:
Earnings Before
Year
Salary and Taxes
2016
$ 90,000
2017
120,000
2018
150,000
25
23
a. What would Brown's total taxes (corporate plus personal) be in each year under
(1) A corporation? (2016 tax-$7,297.50)
(2) A proprietorship? (2016 tax=$7,297.50)
b. Should Brown incorporate? Discuss.
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