Bono Owns and Operates a Sole Proprietorship and Has a 32

question 43

Essay

Bono owns and operates a sole proprietorship and has a 32 percent marginal tax rate. He provides his son, Richie, $6,000 a year for college expenses. Richie works as a street musician and has a marginal tax rate of 15 percent. What could Bono do to reduce his family tax burden? How much pretax income does it currently take Bono to generate the $6,000 after taxes given to Richie? If Richie worked for his father's sole proprietorship, what salary would Bono have to pay him to generate $6,000 after taxes? (Ignore any Social Security, Medicare, or self-employment tax issues.)How much money would this strategy save?

---

Definitions:

Cost of Capital

The mandatory rate of gain a business must realize on its investment schemes to maintain its market identity and attract funds.

Return on Equity

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how efficiently equity is used to generate profits.

Capital Employed

The total amount of capital used for the acquisition of profits by a firm or project, typically represented by the value of all assets minus current liabilities.

Financial Leverage

The use of borrowed funds to increase the potential return on investment, often measured by the ratio of a company’s debt to equity.