Steven James earned $150,000 this year in profits from his proprietorship,which placed him in a 45% tax bracket.The rate of tax for Canadian-controlled private corporations in his province is 15% on the first $500,000 of income.Personal tax rates (federal plus provincial)in James' province are:
(All rates are assumed for this question.)
Steven requires $3,000 of after-tax withdrawals per month for his personal living expenses.All remaining profits are used to pay taxes and to expand the business.Steven expects the same profits before living expenses next year.
Steven is considering incorporating his business next year.If he incorporates,he will pay himself a gross salary of $48,000.
Required:
Determine the increase in Steven's cash flow if he incorporates his company? Show all calculations.
A.Why will Steve set his new salary at $48,000?
B.Name the type of tax planning that Steve would be engaging in if he incorporated his company.

Question

Steven James earned $150,000 this year in profits from his proprietorship,which placed him in a 45% tax bracket.The rate of tax for Canadian-controlled private corporations in his province is 15% on the first $500,000 of income.Personal tax rates (federal plus provincial)in James' province are:
  (All rates are assumed for this question.)
Steven requires $3,000 of after-tax withdrawals per month for his personal living expenses.All remaining profits are used to pay taxes and to expand the business.Steven expects the same profits before living expenses next year.
Steven is considering incorporating his business next year.If he incorporates,he will pay himself a gross salary of $48,000.
Required:
Determine the increase in Steven's cash flow if he incorporates his company? Show all calculations.
A.Why will Steve set his new salary at $48,000?
B.Name the type of tax planning that Steve would be engaging in if he incorporated his company.

Quizplus · Accepted Answer

The Answer is A)Excess cash as a proprietorship:

A)Excess cash as a proprietorship: Excess cash as a corporation: B)A $48,000 salary from the corporation will result in $36,120 of after-tax income,similar to his current withdrawals from the proprietorship. [($44,000 × .76)+ (4,000 × .68)] = $36,120 C)Transferring income to another entity

Excess cash as a corporation: A)Excess cash as a proprietorship: Excess cash as a corporation: B)A $48,000 salary from the corporation will result in $36,120 of after-tax income,similar to his current withdrawals from the proprietorship. [($44,000 × .76)+ (4,000 × .68)] = $36,120 C)Transferring income to another entity

B)A $48,000 salary from the corporation will result in $36,120 of after-tax income,similar to his current withdrawals from the proprietorship.
[($44,000 × .76)+ (4,000 × .68)] = $36,120
C)Transferring income to another entity

Steven James Earned $150,000 This Year in Profits from His