Question

Required information [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 10 percent annual before-tax return on a $320,000 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. (Do not round intermediate calculations and round your final answers to the nearest whole dollar.) 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 decimal places.) & Answer is complete but not entirely correct. LLC Overall Tax Rate 31.04 35.85 % % corporation

Answer 1

Answer:

Net income before taxes = $32,000 ($320,000*10%)

a)

There are two alternatives for Andrea to organize SHO as either an LLC (taxed as a sole proprietorship) or a corporation.

i) Alternatives - 1 LLC

Particulars	Amount
Net income before taxes	$32,000
(-) Deductions for qualified business income (20%) ($32,000 x 20%)	($6,400)
Taxable income	$25,600
Tax on income @ 35% ($25,600 x 35%)	$8,960
Self employment tax @ 2.9% (25,600 x 2.9%)	$742
Additional medicare @ 0.9% (25,600 x 0.9%)	$230
Total tax	$9,932
Cash after tax (Net income before taxes-total tax) ($32,000 - $9,932)	$22,068

ii) Alternative -2 - Corporation

Particulars	Amount
Net income before taxes	$32,000
Tax on income @ 21% ($32,000 x 21%)	($6,720)
Income after taxes	$25,280
This will be distributed all dividends Tax on dividends @ 15% ($25,280 x 15%) Net investment tax @ 3.8% ($25,280 x 3.8%)	$3,792 $961
	$4,753
Cash after taxes ($25,280 - $4,753)	$20,527

b)

i) If it is an LLC :

Overall tax rate = Total tax / Net income before taxes x 100

= $ 9,932 / $32,000 x 100

= 31.04%

ii) If it is a Corporation:

Overall tax rate = ( Tax on income + Tax on dividends + Net investment) / Net income before taxes

= (6,720+3,792+961)/$32,000 x 100

=11,473 /$32,000 x 100

= 35.85%