Several years ago, Brian formed Sigma Corporation

C4-58

Several years ago, Brian formed Sigma Corporation, a retail company. Sigma uses the accrual

method of accounting. In the current year, the corporation reported the following items:

Gross profit        $290,000

Long-term capital gain  30,000

Tax-exempt interest received   7,000

Salary paid to Brian         80,000

Payroll tax on Brian’s salary (Sigma’s share)        6,120

Depreciation     25,000   ($21,000 for E&P purposes)

Other operating expenses          89,000

Dividend distribution to Brian   60,000

In addition to owning 100% of Sigma’s stock, Brian manages Sigma’s business and earns

the $80,000 salary listed above. This salary is an ordinary and necessary business expense

of the corporation and is reasonable in amount. The payroll tax on Brian’s $80,000 salary

is $12,240, $6,120 of which Sigma pays and deducts, and the other $6,120 of which

Brian pays through Social Security withholding. Brian is single with no dependents and

claims the standard deduction.

a. Calculate Sigma’s and Brian’s current year taxable income and total tax liability, as

well as their combined tax liability. Also, calculate the corporation’s current E&P after

the dividend distribution.

b. Assume instead that Brian operates Sigma as a sole proprietorship. In the current

year, the business reports the same operating results as above, and Brian withdraws

$140,000 in lieu of the salary and dividend. Brian’s self-employment tax is $20,486.

Compute Brian’s total tax liability for the current year, assuming that he claims a

$35,200 qualified business income deduction.

c. Assume a C corporation such as in Part a distributes all of its after-tax earnings.

Compare the tax treatment of long-term capital gains, tax-exempt interest, and operating

profits if earned by a C corporation with the tax treatment of these items if earned

by a sole proprietorship.

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