Sigma Corporation Introduction: 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 2008, the corporation reported these items: 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 stock, Brian manages Sigma's business and earns the $80,000 salary stated above. The 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 is Sigma pays and deducts, and the other $6000 of which Brian pays through FICA withholding. Brian is single with no dependents and claims the standard deduction.
Using MS Excel and implying the necessary formulas
a. Compute Sigma and Brian's 2008 taxable income and total tax liability, as well as their combined tax liability. Also calculate the corporations 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 dividend. Assume Brian's self employment tax is $17,000. Compute Brian's total tax liability for 2008.
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, operating profits if earned by a C corporation with the tax treatment of these items if earned by a sole proprietorship.