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 15 percent annual before-tax return on a $740,000 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 3.8 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. (Round your intermediate computations to the nearest whole dollar amount.)

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 a C corporation?

b. What is the overall tax rate on SHO’s income in the first year if SHO is organized as an LLC or as a C corporation?

Requlred Informatlon The following information applies to the questions displayed below.] 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 15 percent annual before-tax return on a $740,000 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 3.8 percent net investment income tax on dividends and capital gains she recognizes. ỉfAndrea organizes SHO as an LC. 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. (Round your Intermedlate computatlons to the nearest whole dollar amount.) 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? Answer is complete but not entirely correct. After-tax ca flow LLC 88,242 71.205 ration

Answer 1

a. Calculate the amount of cash after taxes to be received by Andrea under each of the alternatives as follows LLC Net income before taxes ($740,000 x 15% Less: Deduction for QBI ($111,000 x 20 %) Taxable income Income tax ($88,800 x 35%) Self-employment tax ($88,800 x 2.9%) Additional maedicare ($88,800x 0.9%) Total tax ($31,080 $2,575$799) 111000 22200 88800 31080 2575 799 34454 Cash after tax ($111,000-$34,454) 76546 C Corporation Net income before taxes ($740,000 x 15%) Less: Income tax ($111,000 x 21 % ) Income after taxes (to be distributed as dividends) Tax on dividends ($87,690 x 15%) Net investment tax (87,690 x 3.8%) Tax on dividends and net investment tax ($13,154 $3,332) Total tax ($23,310 + $16,486) Cash after tax ($111,000 $39,796) 111000 23310 X 87690 13154 3332 16486 + 39796 X 71204 follows Calculate the overall tax rate under each alternative as LLC Total tax 34454 Net income before taxes 111000 Overeall tax rate ($34,454 / $111,000) 31.04% C Corporation Total tax 39796 Net income before taxes Overeall tax rate ($34,454/ $111,000) 111000 35.85%