Question

Required Information The following Information applies to the questions displayed below. Andrea would like to organize SHO as elther an LLC (taxed as a sole proprietorship) or a C corporation. In elther form, the entity Is expected to generate an 15 percent annual before-tax return on a $740.000 Investment. Andrea's marglnal Income tax rate Is 35 percent and her tax rate on dividends and capital galns Is 15 percent Andrea will also pay a 3.8 percent net Investment Income tax on dividends and capital gains she recognlzes. If Andrea organizes SHO as an LLC Andrea will be required to pay an additional 29 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Further, she Is ellgible to clalm the full deduction for qualified business Income. Assume that SHO will pay out all of its after-tax earmings 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 SHO's Income In the first year if SHO Is organized as an LLC or as a C corporation? (Round your final answers to 2 declmal places.) Overall Tax Rate LLC

Answer 1

Solution:

a.)

S.No	Particulars	LLC	Description	C Corp	Depreciation
1.	Pretax earnings	$111,000	15%*$740,000	$111,000	15%*%740,000
2.	Entity level tax rate	0%		21%
3.	Entity level tax	0		$23,310	(1)*21%
4.	Earnings after entity-level tax	$111,000	(1) - (3)	$87,690	(1)-(3)
5.	QBI deduction	($22,200)	(4)*20%	NA
6.	Deduction for 50 percent of SE tax	($1,486)	(1)*0.9235*0.029*0.50	NA
7.	Net income taxable to owner	$87,314	(4)-(5)-(6)	$87,690	(4) distributed as dividend
8.	Income tax paid by owner	$30,560	(7)*0.35	$13,154	(7)*0.15
9.	Self-employment tax	$2,973	(1)*0.9235*0.029	NA
10.	Additional Medicare tax/Net investment income tax	$923	(1)*0.9235*0.009 additional Medicare tax	$3,332	(7)*0.038 net investment income tax
11.	Owner level tax	$34,456	(8)+(9)+(10)	$16,486	(8)+(10)
12.	After tax Cash flow	$76,544	(1)-(11)	$71,204	(7)-(11)

b.)

S.No	Particulars	LLC	Description	C Corp	Description
13.	Overall tax rate	31.04%	(11)/(1)	35.85%	((3)+(11))/(1)