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Kamal is starting a new business in 2014 which will operate as an S corporation. This means that income earned by the corporation will be reported by shareholders even if they do not receive distributions. Kamal has $130,000 of income from other sources, and itemized deductions totaling $15,000. He expects that the new business will preduce $30,000 of income each year. He is considering giving his son Rashid 20% of the stock in the corporation. Rashid is age 24, and is Kamal's dependent. Rashid's only other income is $2,000 of interest. Neither Kamal nor Rashid will be employed by the corporation. Which alternative will produce a lower income tax liability - having all stock ownded by Kamal or having Kamal own 80% of the stock and Rashid own 20%? Assume Kamal's filing status is head-of-household and Rashid is single. Ignore other taxes. How would the answer be different if Rashid were age 17? Ignore credits.

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Category:- Accounting Basics
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