Mr. Olsen has a marginal tax rate on ordinary income of 37 percent. He currently earns $100,000 per year through a business operated as a sole proprietorship. If Mr. Olsen does not require current cash from the business, calculate the potential increase or decrease in his annual tax liability if he incorporates and operates the business through a regular corporation.

Question

Quizplus · Accepted Answer

Incorporating and operating the business through a regular corporation could allow Mr. Olsen to benefit from the lower corporate tax rate, which is 21%. If he earns $100,000 and pays tax at the corporate rate instead of his personal marginal rate of 37%, the tax savings would be 16% of $100,000, which equals $16,000. This calculation assumes he leaves the earnings within the corporation and does not take them out as dividends, which would be subject to personal income tax.

Mr Olsen Has a Marginal Tax Rate on Ordinary Income