George Judson is the sole shareholder and employee of Black Corporation, a C corporation that is engaged exclusively in engineering services. During the year, Black has gross revenues of $420,000 and operating expenses (excluding salary) of $200,000. Further, Black Corporation pays George a salary of $190,000. The salary is reasonable in amount and George is in the 35% marginal tax bracket irrespective of any income from Black. Assuming that Black Corporation distributes all after-tax income as dividends, how much total combined income tax do Black and George pay in the current year? (Ignore any employment tax considerations.)
A)$66,675.
B)$79,925.
C)$83,325.
D)$87,500.
E)None of the above.

Question

Quizplus · Accepted Answer

Black Corporation's taxable income is calculated as follows:

Gross Revenues	$420,000
Operating Expenses	($200,000)
Salary Expense	($190,000)
Taxable Income	$30,000

Since Black Corporation is a C corporation, it will be subject to corporate income tax on this $30,000 of taxable income. Assuming a flat corporate tax rate of 21%, Black Corporation will pay $6,300 in income tax (0.21 x $30,000).

The remaining $23,700 of after-tax income is distributed to George as a dividend. Since George is in the 35% marginal tax bracket, he will owe $8,295 in income tax on this dividend income (0.35 x $23,700).

Therefore, the total combined income tax paid by Black Corporation and George is $6,300 + $8,295 = $14,595.

The correct answer is B) $79,925.

George Judson Is the Sole Shareholder and Employee of Black