Question

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 ac corporation in either form, the entity is expected to generate an 7 percent annual before-tax return on a $690.000 investment. Sandra's marginal income tax rate is 37 percent and her lax 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 incorne is not qualified business Income (QBI) SO Sandra is not allowed to claim the Qol deduction Assume that BAL will distribute all of its aner-tax earnings every year as a dividend it is formed as a 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 of BAL IS organized as either an ulcorac corporation?

b what is the overall tax rate on BALs income in the first year if bal is organized as an LLC or as a c corp

Answer 1

Part A

	After tax cash flow
LLC	$28973
C corporation	$29076

Part B

	Overall tax rate
LLC	40.01%
C corporation	39.80%

Part A

		LLC	Description	C corp.	Description
1.	Pretax earnings	48300	(690000*7%)	48300	(690000*7%)
2.	Entity level tax rate	0%		21%
3.	Entity level tax	0		10143	(1) × (2)
4.	Earnings after-entity-level tax	48300	(1) – (3)	38157	(1) – (3)
5.	Deduction for 50 percent of SE tax	(647)	(1) × 0.9235 ×0.029 × 0.5		NA
6.	Net income taxable to owner	47653	(4) + (5)	38157	(4) distributed as dividend
7.	Income tax paid by owner	17632	(6) × 0.37	7631	(6) × 0.20
8.	Self-employment tax	1294	(1) × 0.9235 × 0.029
9.	Additional Medicare tax/Net investment income tax	401	(1) × 0.9235 × 0.009 additional Medicare tax	1450	(6) × 0.038 net investment income tax
10.	Owner-level tax	19327	(7) + (8) + (9)	9081	(7) + (9)
	After-tax cash flow	28973	(1) – (10)	29076	(6) – (10)

Part B

10.	Owner-level tax	19327	(7) + (8) + (9)	9081	(7) + (9)
	After-tax cash flow	28973	(1) – (10)	29076	(6) – (10)
	Overall tax rate	40.01%	(10)/(1)	39.80%	[(3) + (10)]/(1)

19327/48300=40.01%

(10143+9081)/48300 = 39.80%