Question

Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 11 percent annual before-tax return on a $890,000 investment. Andrea's marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent. Andrea will also pay a 38 percent net investment income tax on dividends and capital gains she recognizes. If Andrea organizes SHO as an LLC Andrea will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Further, she is eligible to claim the full deduction for qualified business income. Assume that SHO will pay out all of its after-tax earnings every year as a dividend if it is formed as a C corporation. (Do not round intermediate calculations and round your final answers to the nearest whole dollar.) Problem 15-44 Part a a. How much cash after taxes would Andrea receive from her investment in the first year if SHO is organized as either an LLC or ac corporation? After-tax cash flow LLC C corporation

Answer 1

	Req. A	LLC		C Corp
1	Pretax Earnings	$ 97,900	890000*11%	$ 97,900	890000*11%
2	Entity level tax rate	0%		21%
3	Entity level tax rate	$          -	(1)*(2)	$ 20,559	(1)*(2)
4	Earnings after Entity level tax rate	$ 97,900	(1)-(3)	$ 77,341	(1)-(3)
5	QBI Deduction	$ 19,580	(4)*20%	NA
6	Deduction for 50% of SE Tax	$   1,311	(1)*0.9235*0.029*0.5	NA
7	Net income taxable to owner	$ 77,009	(4)-(5)-(6)	$ 77,341	(4)-(5)-(6)
8	Income tax paid by owner	$ 26,953	(7)*0.35	$ 11,601	(7)*0.15
9	Self employment tax	$   2,622	(1)*0.9235*0.029	NA
10	Additional Medicare/ Net Investment Income Tax	$      814	(1)*0.9235*0.009 Add Medicare Tax	$   2,939	(7)*0.038 Net Invest. Tax
11	Owner level Tax	$ 30,389	(8)+(9)+(10)	$ 14,540	(8)+(10)
12	After Tax Cashflow	$ 67,511	(1)-(11)	$ 62,801	(1)-(11)
	Req. B
	Overall Tax Rate	31.04%	(11)/(1)	35.85%	[(3)+(11)]/1