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Jack Flubber, who owns Sons of Flubber Construction Co., and runs it as a proprietorship, had gross profits last year of $120,000. He has $7,000 in exemptions and deductions. He paid $30,000 in taxes. If he paid himself a salary of $65,000 and a dividend of $15,000 taxed at 20%, how much he would save if he decided to incorporate as a closely held corporation with a 25% tax rate (choose the closest answer)

Answer :

Answer: He won't be able to save

Explanation:

The options are:

a. He won't be able to save.

b. Around $4k

c. Around $7k

d. Around $8k

Based on the information given in the question, the amount that he'll save will be:

Firstly, we calculate the corporate tax which will be:

= ($120000 - $65000) × 25%

= $55000 × 25%

= $13750

Then, Flubber's personal tax will be:

= ($80000 - $7000) × 20%

= $73000 × 20%

= $14,600

Therefore, the total tax will be:

= $14600 + $13,750

= $28,350

Then, the total amount saved will be:

= $30,000 - $28,350

= $1650

Based on the options given, he won't be able to save.

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