Stacey, Cooper, and Nathan each own one-third of the outstanding stock of Theatrical Supplies, Incorporated, a small supplier of Broadway costumes. Stacey (age 45), the CEO of the company, anticipates the business having a net income of about $1,500,000 in 2001. This is about the same as past years.
In past years, the accountant has had the business pay a “bonus” to the three owners that approximates the corporations earnings; thereby, avoiding the “double” tax that is associated with C-corporations.
Because Stacey requires about $300,000 of annual income to maintain her current standard of living, she saves any income in excess of $300,000 for her retirement. She hopes to save enough to retire in about 15 years.
If the corporation paid each owner a bonus of $500,000 (i.e., one-third of $1,500,000), Stacey would have $200,000 (before taxes) to save for her retirement. This $200,000 would be taxed at the top federal marginal income tax rate of 39.6%. Stacey is also subject to a Massachusetts state marginal income tax of 6%. After tax, she sees only about $108,800 of the $200,000 that she does not need for current living expenses.