McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 9

For the current year, Custom Craft Services Inc.(CCS), a C corporation, reports taxable income of $200,000 before paying salary to Jaron the sole shareholder.Jaron's marginal tax rate on ordinary income is 35 percent and 15 percent on dividend income.Assume CCS's tax rate is 35 percent.a.How much total income tax will Custom Craft Services and Jaron pay on the $200,000 taxable income for the year if CCS doesn't pay any salary to Jaron and instead distributes all of its after-tax income to Jaron as a dividend?
b.How much total income tax will Custom Craft Services and Jaron pay on the $200,000 of income if CCS pays Jaron a salary of $150,000 and distributes its remaining after-tax earnings to Jaron as a dividend?
c.Why is the answer to part b lower than the answer to part a?