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Option #1: Taxation of Various Business Forms

Option #1: Taxation of Various Business Forms

Description

Thomas is the sole owner of Bear Company, which makes custom blankets. In 2019, Bear’s taxable income before any compensation to Thomas was $80,000. Bear also had $30,000 of municipal bond interest. Thomas has significant income from other sources. Thomas is single and in the 24% marginal tax bracket. Determine the tax consequences to both Bear Company and Thomas under the following situations (ignore the 3.8% Medicare surtax on Net Investment Income):

  1. Bear is a C corporation and pays no dividends or salary to Thomas.
  2. Bear is a C corporation and distributes $50,000 of dividends to Thomas.
  3. Bear is a C corporation and pays $50,000 salary to Thomas.
  4. Bear is a sole proprietorship and Thomas withdrew $0.
  5. Bear is a sole proprietorship and Thomas withdrew $50,000.

Write a letter to Thomas summarizing the tax effects of the various scenarios, including some tax planning recommendations. Include an explanation of general concepts surrounding the calculation.