Orville and Olivia Are Single Taxpayers Who Own and Operate

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The Answer is a.The total income tax liability is $44,358 ($17,929 + $18,929 + $7,500).Orville's income tax liability is $17,929,Olivia's income tax liability is $18,929 and Brimstone's income tax liability is $7,500.Owners can be employees of a corporation and the salaries paid to Orville and Olivia are deductible by the corporation.Dividends paid to shareholders are not deductible by the corporation,but are taxable to the shareholders.The corporation's taxable income is $50,000 ($150,000 - $30,000 - $70,000)and its income tax liability is $7,500 ($50,000 *15%).Orville is taxed on his $30,000 salary and the $30,000 in dividends he receives.His taxable income is $100,000 ($30,000 + $30,000 + $40,000)and his income tax liability is $17,929 [$4,991.25 + 25% *($70,000 - $36,250)+ 15% * $30,000].Olivia is taxed on her $70,000 salary and the $20,000 in dividends she receives.Her taxable income is $100,000 ($70,000 + $20,000 + $10,000)and her income tax liability is $18,929 [$4,991.25 + 25% *($80,000 - $36,250)+ 15% * $20,000].
b.The total income tax liability is $42,586 ($21,293+ $21,293).Orville's income tax liability is $21,293 and Olivia's income tax liability is also $21,293.Owners can be employees of an S corporation and the salaries paid to Orville and Olivia are deductible by the corporation.Dividends paid to shareholders are not deductible by the corporation,and are not taxable to the shareholders.The corporation's taxable income is $50,000 ($150,000 - $30,000 - $70,000).Orville is taxed on his $30,000 salary and his $30,000 share of the S corporation's income.His taxable income is $100,000 ($30,000 + $30,000 + $40,000)and his income tax liability is $21,293[$17,891.25 + 28% * ($100,000 - $87,850)].Olivia is taxed on her $70,000 salary and her $20,000 share of the S corporation's taxable income.Her taxable income is also $100,000 ($70,000 + $20,000 +$10,000)and her income tax liability is $21,293.By electing subchapter S,they would save income tax of $1,135 ($43,721 - $42,586),and they would avoid double taxation on dividends from Brimstone Corporation.

Orville and Olivia Are Single Taxpayers Who Own and Operate

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