Bono Owns and Operates a Sole Proprietorship and Has a 30

question 79

Essay

Bono owns and operates a sole proprietorship and has a 30% marginal tax rate.He provides his son,Richie,$12,000 a year for college expenses.Richie works as a street musician and has a marginal tax rate of 15%.What could Bono do to reduce his family tax burden? How much pre-tax income does it currently take Bono to generate the $12,000 after-taxes given to Richie? If Richie worked for his father's sole proprietorship,what salary would Bono have to pay him to generate $12,000 after taxes? (Ignore any Social Security,Medicare,or Self Employment Tax issues.)How much money would this strategy save?

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Definitions:

Current Liability

Financial obligations a company owes and is expected to pay within a year.

Long-term Liability

A debt or obligation not due within the current accounting year, requiring repayment over a longer period.

Warranty Repairs

Services provided to repair or fix products free of charge under a warranty agreement, considered a contingent liability when the product is sold.

Parts Inventory

The stock of components or parts kept on hand by a company to assemble products or perform service maintenance.