In 2000, Craig and Kathy Koehler 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 Koehlers expected the company to earn $100,000 before taxes next year.They planned to take out a salary of $45,000, and to reinvest the rest in the business.Their personal deductions total $10,750 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?
A)$19,393.50; $22,250.00; No
B)$19,393.50; $13,887.50; Yes
C)$6,793.50; $6,637.50; Yes
D)$22,403.50; $15,753.50; Yes
E)$20,777.50; $22,250.00; No

Question

Quizplus · Accepted Answer

1) As a proprietorship, their expected total tax liability can be calculated as follows:
- Income tax on business income: $100,000 x 0.153 = $15,300
- Self-employment tax (assume 15.3%): ($100,000 - $45,000 - $10,750) x 0.153 = $4,093.50
Total tax liability: $15,300 + $4,093.50 = $19,393.50

2) As a corporation, their expected total tax liability can be calculated as follows:
- Corporate income tax (assume 21%): $55,000 x 0.21 = $11,550
- Personal income tax on salary: $45,000 x 0.24 = $10,800
Total tax liability: $11,550 + $10,800 = $22,350

3) The Koehlers should incorporate because their total tax liability would be lower as a corporation. The tax savings from incorporating would be $19,393.50 - $13,887.50 = $5,506, which is significant. Additionally, incorporating would provide limited liability protection for the Koehlers.

In 2000, Craig and Kathy Koehler Owned a Small Business