Several years ago, Brian formed Sigma Corporation, a retail company that does not qualify for the U.S. Production activities deduction. Sigma uses the accrual method of accounting. In 2012, the corporation reported the items shown in comprehensive problem C:4-58 on page C4-45 in the textbook.
Gross profit $290,000
Long-term capital gain 20,000
Tax-exempt interest received 7,000
Salary paid to Brian 80,000
Payroll tax on Brian's salary (Sigma's share) 6,000
Depreciation 25,000 ($21,000 for E&P purposes)
Other operation 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 $12,000, $6,000 of which Sigma pays and deducts, and the other $6,000 of which Brian pays through Social Security (FICA) withholding. Brian is single with no dependents and claims the standard deduction.
a. Compute Sigma's and Brian's 2007 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. Assume Brian's self-employment tax is
$17,000. Compute Brian's total tax liability for 2007.
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