In 2000, Craig and Kathy Khumalo owned a small business which was held as a proprietorship in Kathy's name.They were thinking of incorporating if that would lower their total tax liability.The Khumalos expected the company to earn R100,000 before taxes next year.They planned to take out a salary of R45,000, and to reinvest the rest in the business.Their personal deductions total R10,750 and if they choose not to incorporate they will file a joint return.(1) What is their expected total tax liability as a proprietorship? (2) As a corporation? (3) Should they incorporate?

Question

Quizplus · Accepted Answer

1) As a proprietorship:
Taxable income = R100,000 - R45,000 - R10,750 = R44,250
Tax liability = (0.18*R44,250) + R3,135 = R11,853 + R3,135 = R14,988.50

2) As a corporation:
Taxable income = R100,000 - R45,000 = R55,000
Tax liability = (0.28*R55,000) = R15,400
Dividend tax liability = (0.2*(R100,000-R45,000-R15,400)) = R7,640
Total tax liability = R15,400 + R7,640 = R13,887.50

3) The Khumalos should incorporate because the total tax liability is lower as a corporation compared to a proprietorship.

In 2000, Craig and Kathy Khumalo Owned a Small Business