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Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. (Use the tax rate schedule.) a. Using the single individual tax brackets and the corporate tax rate, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues). (Do not round your intermediate calculations. Round your final answer to two decimal places.)

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To insights and perspectives of the corporate tax rate of 15%, $50,000 of the projected $200,000 in earnings should be kept in the business.

Given:

Taxable income next year = $250,000

Income from sole proprietorship = $200,000

So,

Taxable income not related to sole proprietorship = $250,000 - $200,000

Taxable income not related to sole proprietorship = $50,000

To begin, compare the given individual and corporation tax rates in order to reduce taxable income.

Moana has $50,000 in tax liability that is not linked to her sole business, and she is now in the 25% income range (the excess above $37,450 is taxed at 25%).

The goal is to divide the $200,000 between Moana and her company in such a way that her income tax burden is minimized. The corporation tax rate is 15% (income taxes under $50,000), which is less than Moana's 25% income tax rate.

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