Question

Megan operates a housecleaning business as a sole proprietorship. She oversees a team of 10 cleaning personnel, markets the business, and provides supplies and equipment. The business has been generating net taxable profits of $50,000 per year, before considering the QBI deduction. As a sole proprietor, Megan qualifies for the 20 percent deduction, reducing taxable income from the business to $40,000.

a. Assume that Megan’s marginal tax rate on ordinary income is 35 percent and that she has no pressing need for cash flow from this business. Should Megan consider incorporating and operating the business through a C corporation? Fill the below table to justify your answers. (Ignore any payroll or self-employment tax considerations.)

a) Income tax liability if operated as a C corporation? ______________

Income tax savings? _________________

Should Megan consider incorporating and operating the business through a C corporation? _____________

b) How would your conclusion in part a change if Megan's marginal tax rate were only 28%? ______________

Answer 1

Ans- from 2018 corporate tax rate is flat 21%:-

Should incorporate as C corporation because there is significant tax saving as below:-

	Individual	Corporate
Taxable Imcome	$40,000	$50,000
Tax (40,000*35%) (50,000*21%)	$14,000	$10,500

B-although there is no change in decision ,however it can be changed because

Tax saving is not much as below in corporate

If she need cash flow it will be taxable as dividend

Tax

	Individual	corporate
Taxable income	$40,000	$50,000
Tax (40,000*28%) (50,000*21%)	$11,200	$10,500