Question

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0 Required information The following information applies to the questions displayed below Sandra would like to organize BAL 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 $730,000 investment. Sandra's marginal income tax rate is 37 percent and her tax rate on dividends and capital gains is 23.8 percent (including the 3.8 percent net investment income tax). If Sandra organizes BAL as an LLC, she will be required to pay an additional 2.9 percent for self- employment tax and an additional O.9 percent for the additional Medicare tax. BAL's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBl deduction. Assume that BAL will distribute all of its after-tax earnings every year as a dividend if it is formed as a C corporation. (Round your intermediate computations to the nearest whole dollar amount.) b. What is the overall tax rate on BAL's income in the first year if BAL is organized as an LLC or as a C corporation? (Round your final answers to 2 decimal places.) Overall Tax Rate LLC C corporation

Answer 1

Answer :

	OVERALL TAX RATE
LLC	40.8 %
C Corporation	39.8 %

Working Notes :

Particulars	LLC	Description	C Corporation	Description
(1). Pretax Earnings	$80,300	730,000 × 11	$80,300	730,000 × 11
(2).Entity level Tax	0	-	(16,863)	(1) × 21 %
(3). After tax entity earnings	$80,300	(1) - (2)	$63,437	(1) - (2)
(4).Owner's Tax	(32,762)	(3) × 40.8%	(15,098)	(3) × 23.8 %
(5). After tax earnings	$47,538	(3) - (4)	$48,339	(3) - (4)
Overall Tax	40.8 %	(4) ÷ (1)	39.8 %	[(2) + (4)] ÷ (1)

• For C corporation flat tax rate is now 21 %
• Owner's tax rate for LLC including additional self employment and medicare tax = 37 + 2.9 + 0.9 = 40.8%
• Owner's tax for C corporation is taken inclusive of net investment tax.