Reference no: EM132660779

Problem - A Half-Baked Idea?

Samantha Johnson owns Skylark Bakery. Currently, the bakery is operated as a sole proprietorship and generates an annual operating profit of $100,000. In addition, the bakery earns annual dividends of $5,000 from investing excess working capital in the stock of publicly traded corporations. These stock investments typically are held for a minimum of three to four months before funds are required for the business. As a result of earning income from other business ventures and investments, Samantha is in the 37 percent marginal tax bracket before considering bakery operations. In the past, Samantha has withdrawn $50,000 annually from the bakery, which she regards as reasonable payment for her services.

Samantha has asked you about the tax consequences of conducting the business as a regular (C) corporation. Based on the information given, what would be the annual income tax savings (or cost) of operating the bakery as a corporation? For purposes of this analysis, use the 2019 tax rates and ignore any employment tax or state tax considerations.