Question

Amanda 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 8 percent annual before-tax return on a $500,000 investment. Amanda’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 Amanda 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. Also, she is eligible to claim a full deduction for qualified business income on BAL’s income. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation.

a. How much cash after taxes would Amanda 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?

Answer 1

Refer below images for the above asked questions in a detailed way of explanation with workings.
Solution receive from is organized as How much cash her investment either an LLC after in the corsa taxes would Amanda first year it BAL c corporation: LLC particolars Working working C Corporation $40,000 y pretax 6500000 * 804 $40,000 earnings $500000 X8.1. 01. 21.11 0x2101 $ 40,000 X 21%. $ 8400 $31,600 $40,000 $40,000-50 $ 40,000 - $ 8400 ($8000) $40,000x 204. NA 2) Entity level tax Yate 3) Entity level tax 4) Earnings-after-entity Level tax 5) QBE Deduction 6) Deduction for Sool of se tax 7 Net income taxable to owner & Income tax paid by ($536) $31464 $40,000+ •9235 NA xong x.5 $40000 - $ 8000 $15800 -$536 $31464 x 037 $3160 $31600 X 561 distributed as dividend a $15800 X 20 NA $11642 $1071 $332 $600 415800 X -038 (Net investment a a sert employment Tax 10) Additional Medicare Tax / wet investment income tax 1.) owner level tot Tolome Tax) $49000 4.9235 X.029 $40,000x19235 x.009 (Additional Medicare Tax) $11642 + $1071 +$332 $40,000 $13045 $13045 $3760 $31604 9600 & 15800 -$3760 $12040 After for cash flow $26955

b) what is first as a the overall tax rate year if BAL is c corporation : on BAL's income in the organised as an LLe cory CCOYP- LLC Worlling working particolars Tax overall 32.661- 30.47 $13045 $ 40000 - XIDO 8400 +4376970 $ 40.000 Rate Note point: → Note that while the overall tax rate is lower for the LLe income, Amanda ends up with tess e cash in year I it BAL is organised as a c corporation & because BAL retained half of its after tax income.