Question

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 $550,000 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 0.9 percent for the additional Medicare tax. BAL’s income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI 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.)

a. How much cash after taxes would Sandra receive from her investment in the first year if BAL is organized as either an LLC or a C corporation?

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.)

Answer 1

Q. Descolption Descoipion coop. eaeake Petax canings Gafity EnHty level tax date $6000 Urx SSOO00 $GO,500 11Y.x5s0 a17. 3| Entely leel tax $12,705 WX(2) 4 Eaonings after entity level tax $60, 500 C1)-C3) $u7 795 C1) -C3) e tax GBI dedeection Does notaai NA Decdeectfon For 5o pescent F SE tax C 810 ) (1)x0-9235 KOVDEA NA x0.S Rncome taxable to ocoreo (4) +(s) H6) $A795 4)x 00r distok -beittd asd2a $22,085 (4)X0-37 $9,559 G) x0.20 $59,690 Income tay paid by auneo Safempoymal tay $ 1620 (1)x09235x 0.029 (1) x09235X O.009 aRoral medica NA 10 AdditHoncel medicare tax I Net 4 503 $1816 )x0038 ret investment Pncome tax nestmentincome teu Ocones - level tay $ 24,208 (8) +ca)+C10)3 11,375 C8)+C10) $36,292 AFleo-tax cash Flow C)-CII) $36,420 (7)-C11) b. petax Caonings $60, S00 117. x5 5000 $60, SDO 1X50,000 Oy. 21. 2 Entfly level tax ate $12,705 CI)xC2) Entiry level tax eadAf $ 60, S00 CO-C3) $47,795 C)-C3) Brot Qualiy 4. Famings af ter entiry lee tax NA GBI dedeectfon x0-92.35x00ag x O:5 NA 6 Oedeecefon for 50peocerd SE tox C 810) $9.60 Cu)+(5)+6) $47,79s (u)x 100 distikut as dRuidend Income taxable to oumeo Incone tax pald byoconeo $22 085 7)XO 37 $ 9,559 C7)x020 $ 1620U)x 0923Y 0-029 NA Self employmen tay 10 AddPtfonal Medicade tax/net nvestment Pncome tay C7)X0 038 e Pnvestment fhcome tax (1)X0-9235 x 1816 503 ad ioral raltae tax $24,208 C8)+Ca)HC10 11,375 C8) +CI0) $36,420 C7)-C) 39.80y CC3) +U)/CcO) Coner- ea tax C)-) $36,292 40-a.01)/c) Afleo-tax Cashflow Overal tax Rate