Dat, whose marginal tax rate on additional earnings is 35 percent on ordinary income and 15 percent on dividends, is the sole owner of the stock in
Premton Corporation. The corporation earned $1.2 million for calendar year 2020 before these items:
Salary to Dat ($15,000 monthly) $180,000
Tax preferred benefits to Dat (Medical, etc.) $70,000
The corporate tax rate is a flat 21 percent.
Write a short memo to Dat explaining the tax advantages/disadvantages of the salary and benefits and whether Dat should considering increasing or decreasing
the salary and/or the fringe benefits.
How is any change in these amounts the result of “shifting” tax consequences? Explain.
Sample Solution