Peter has a sole proprietorship, and his sister Shirley is the sole shareholder in a C-corporation. This year, Peter's sole proprietorship had $500,000 of taxable income. Shirley's C-corporation also had $500,000 of taxable income. Since Peter's sole proprietorship is new, he was unable to take any cash or property out of the business this year. Shirley's C-corporation also did not distribute any cash or property to Shirley this year. Both Peter and Shirley have income from other sources that put them in the 37% tax bracket before considering their income from their respective businesses.
a. Both Peter and Shirley will have $500,000 of taxable income for their respective businesses this year (Peter from his sole proprietorship and Shirley from her C-corporation).
b. Peter will have a federal income tax liability of $185,000 on his income from the sole proprietorship. (Note: he cannot claim the qualified business income deduction).
c. Since Shirley is in the 37% bracket, the $500,000 taxable income of her C-corporation will be taxed at 20%.
d. Both b. and c.
e. None of the above.