Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.)
A) $40,295
B) $54,995
C) $63,325
D) $64,396
E) None of these.

Question

Quizplus · Accepted Answer

White Corporation's taxable income is calculated as operating income ($320,000) minus operating expenses ($150,000) and minus Nancy's salary ($100,000), resulting in $70,000 of taxable income. The corporate tax rate is 21%, so White pays $14,700 in corporate income tax ($70,000 * 21%). The after-tax income available for distribution as dividends is $55,300 ($70,000 - $14,700). Nancy pays tax on her salary at the 32% rate, which is $32,000 ($100,000 * 32%), and she also pays tax on the dividends received. Assuming the qualified dividends rate of 15% for her tax bracket, she pays an additional $8,295 in tax on the dividends ($55,300 * 15%). The total combined income tax paid by White and Nancy is the sum of corporate tax ($14,700), tax on salary ($32,000), and tax on dividends ($8,295), which equals $54,995.

Nancy Smith Is the Sole Shareholder and Employee of White