During the Current Year, Maroon Company Had $125,000 Net Profit

question 107

Essay

During the current year, Maroon Company had $125,000 net profit from operations. Belinda, the sole owner of Maroon, is in the 33% marginal tax bracket. Determine the combined tax burden for Maroon and Belinda under the following independent situations. (Ignore any employment taxes.)
a. Maroon Company is a C corporation and all of its after-tax income is distributed to Belinda.
b. Maroon Company is a proprietorship and all of its after-tax income is withdrawn by Belinda.
c. Maroon Company is an S corporation and all of its after-tax income is distributed to Belinda.

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Definitions:

Operating Assets

Assets that are used in the day-to-day operations of a business to generate revenue, such as equipment, inventory, and property.

Return on Investment

A measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the profit earned on the investment by the cost of the investment.

Minimum Rate

The lowest acceptable or allowable rate, often referring to wages, interest rates, or other financial variables.

Annual Margin

The amount of profit a company generates over a year after all expenses have been subtracted from revenues.