Reference no: EM132224690

Question - Several years ago, Brian formed Sigma Corporation, a retail company. Sigma uses the accrual method of accounting. In the current year, the corporation reported the following items:

Gross profit	$290,000
Long-term capital gain	30,000
Tax-exempt interest received	7,000
Salary paid to Brian	80,000
Payroll tax on Brian's salary (Sigma's share)	6,120
Depreciation	25,000 ($21,000 for E&P purposes)
Other operating expenses	89,000
Dividend distribution to Brian	60,000

In addition to owning 100% of Sigma's stock, Brian manages Sigma's business and earns the $80,000 salary listed above. This salary is an ordinary and necessary business expense of the corporation and is reasonable in amount. The payroll tax on Brian's $80,000 salary is $12,240, $6,120 of which Sigma pays and deducts, and the other $6,120 of which Brian pays through Social Security withholding. Brian is single with no dependents and claims the standard deduction.

a. Calculate Sigma's and Brian's current year taxable income and total tax liability, as well as their combined tax liability. Also, calculate the corporation's current E&P after the dividend distribution.

b. Assume instead that Brian operates Sigma as a sole proprietorship. In the current year, the business reports the same operating results as above, and Brian withdraws $140,000 in lieu of the salary and dividend. Brian's self-employment tax is $20,486. Compute Brian's total tax liability for the current year, assuming that he claims a $35,200 qualified business income deduction.

c. Assume a C corporation such as in Part a distributes all of its after-tax earnings. Compare the tax treatment of long-term capital gains, tax-exempt interest, and operating profits if earned by a C corporation with the tax treatment of these items if earned by a sole proprietorship.