Should Orie and Jane Incorporate Their Sole Proprietorship?
Analysis of Orie and Jane's Tax Situation
Orie and Jane, a husband and wife, are currently operating a sole proprietorship. They are projecting their taxable income for the next year to be $450,000, with $250,000 attributed to the sole proprietorship itself. They are considering incorporating their business and are evaluating the potential tax implications associated with this decision.
Tax Rate Schedule
The current tax rate schedule for individual taxpayers is as follows:
Income Tax Rates:
| Income Range | Tax Rate |
|---|---|
| $0 - $40,000 | 15% |
| $40,001 - $85,000 | 25% |
| $85,001 - $160,000 | 28% |
| $160,001 - $250,000 | 33% |
| $250,001 - $450,000 | 38% |
Answer:
Explanation:
If Orie and Jane decide to convert their sole proprietorship into a corporation, their income would be subject to taxation at a lower overall rate. This would result in a total tax savings of $19,791.
To further reduce their tax liability, Orie and Jane could consider retaining $172,600 within the company.
Should Orie and Jane incorporate their sole proprietorship based on the analysis of their tax situation? What factors should they consider before making a decision? Orie and Jane should carefully weigh the potential tax savings against the costs and administrative burdens of incorporating their business. Factors to consider include the legal and accounting fees associated with setting up a corporation, ongoing compliance requirements, and the long-term growth plans for the business. Additionally, they should consult with a tax professional to ensure that the decision aligns with their overall financial goals and objectives.