Assume, John Hankins, who owns Hankins Construction Co. and runs it as a proprietorship, had gross profit last year of $ 100,000. His personal and family expenses are $50,000 and he has $10,000 in exemption and deductions. As a proprietor, he paid $22,000 in taxes.
a) If he paid himself a salary of $60,000 taxed at 20%, would it be advantageous for him to incorporate as a closely held corporation? Explain.
b) What taxes would John pay as a closely held corporation if he issued himself a dividend of $10,000 after paying his salary?
Assume the corporate tax is 34% if the taxable income is more than $75,000, otherwise use 25% as corporate tax.