Benton Company (BC) has one owner, who is in the 35% Federal income tax bracket. BC’s gross income is $295,000, and its ordinary trade or business deductions are $135,000. Compute the tax liability on BC’s income for 2012 under the following assumptions:
a. BC is operated as a proprietorship, and the owner withdraws $70,000 for personal use.
b. BC is operated as a corporation, pays out $70,000 as salary, and pays no dividends to its shareholder.
c. BC is operated as a corporation and pays out no salary or dividends to its shareholder.
d. BC is operated as a corporation, pays out $70,000 as salary to its shareholder, and pays out the remainder of its earnings as dividends.
e. Assume that Robert Benton of 1121 Monroe Street, Ironton, OH 45638 is the owner of BC, which was operated as a proprietorship in 2012. Robert is thinking about incorporating the business in 2013 and asks your advice. He expects about the same amounts of income and expenses in 2013 and plans to take $70,000 per year out of the company whether he incorporates or not. Write a letter to Robert [based on your analysis in (a) and (b)] containing your recommendations.