Amber Company Has $100,000 in Net Income in the Current

question 95

Essay

Amber Company has $100,000 in net income in the current year before deducting any compensation or other payment to its sole owner,Alfredo.Assume that Alfredo is in the 33% marginal tax bracket.Discuss the tax aspects of each of the following independent situations.(Assume that any salaries are reasonable in amount and ignore any employment tax considerations.)
a.Alfredo operates Amber Company as a proprietorship.
b.Alfredo incorporates Amber Company and pays himself no salary and no dividend.
c.​Alfredo incorporates Amber Company and pays himself a $50,000 salary and a dividend of $42,500 ($50,000 - $7,500 corporate income tax).

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Definitions:

Compounded Annually

A method of calculating interest where the amount earned is added to the principal at the end of each year, so that the interest for the next year is calculated on the increased principal.

Interest

The charge for borrowing money or the return on investment for funds on deposit, expressed as a percentage of the principal.

Withdrawals

The act of taking out funds from an account, trust, or deposit.

Interest Rate

The amount charged by a lender to a borrower for the use of assets, usually expressed as a percentage of the principal.