Mabel and Alan, who are in the 32% tax bracket, recently acquired a fast-food franchise. Both of them will work in the business and receive a salary of $175,000. They anticipate that the annual profits of the business, after deducting salaries, will be approximately $450,000. The entity will distribute only enough cash each year to Mabel and Alan to cover their Federal income taxes associated with any flow-through income from the franchise. Any remaining profits will be reinvested in the business.
a. What amount will the entity distribute if the franchise operates as a C corporation?
b. What amount will the entity distribute if the franchise operates as an S. corporation.?
c. What will be the amount of the combined entity/owner tax liability in parts (a) and (b)’
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