Orie and jane, husband and wife, operate a sole proprietorship. they expect their taxable income next year to be $300,000, of which $125,000 is attributed to the so

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Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $300,000, of which $125,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. Using the married-joint tax brackets and the corporate tax brackets, find out how much current tax this strategy could save Orie and Jane. How much income should be left in the corporation?

$50000 should be left in the corporation

              $5250 will be saved using this strategy

Explanation:

The married-joint tax bracket = 28% ( marginal tax rate )

corporate tax bracket = 15% for ( $0 to $50000 ) this is the lowest

out of the total taxable income of $300000  

$175000 is not attributed to the sole proprietorship hence it will be taxed using the marginal tax rate of 28%

while $125000 will be taxed using the corporate tax bracket.

To take advantage of the lowest corporate tax bracket,  $50000 out of the $125000 attributed to the sole proprietorship should be retained by the corporation so that the business will have to pay lower corporate tax. the retaining of this amount by the business will therefore bring down the marginal tax rate of Orie and Jane ( married-joint tax bracket ) to 25% because the amount not attributed to the business/corporation will increase

To continue enjoying the lowest tax rates, profits of up to $25000 made from the initial $125000 mapped out for the sole proprietorship should be left in the business/corporation.

28% of $175000 = $49000

25% of $175000 = $43750

hence they will save $5250 on married-joint tax  using this method

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