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Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $450,000, of which $250,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. (Use the tax rate schedule).
a. Using the married-joint tax brackets and the corporate tax rate of 21 percent, find out how much current tax this strategy could save Orie and Jane.
b. How much income should be left in the corporation?

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Answer:

If Orie and Jane converted the sole proprietorship over to a corporation, the income would be taxed at a lower overall rate. The total tax saved would be 19,791

The total let in the company, to decrease the tax liability, would be 172,600

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