Question

BLANK would like to organize JHO 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 $590,000 investment. BLANK'S marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent. BLANK will also pay a 3.8 percent net investment income tax on dividends and capital gains she recognizes. If BLANK organizes JHO as an LLC, BLANK 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 JHO 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.)

How much cash after taxes would BLANK receive from her investment in the first year if JHO is organized as either an LLC or a C corporation?

LLC= ?

C CORP= $37,847

What is the overall tax rate on JHO’s income in the first year if JHO is organized as an LLC or as a C corporation? (Round your final answers to 2 decimal places.)

LLC= ?

C CORP= 35.86%

Answer 1

solutions Net income before taxes = ($ 590 000 x 10%) $59000 (a) There are two alternatives for BLANK to Organize JHO as either an LLC on a 'c' corporation a Alternative-I:LLC] particulasts Amount ($) Net income before taxes 59000 Deduction for qualified business (11800) income (202) 59000 4207 U1200 Tonable income 16520 Tone on income @ 35% (47200x35%) self employment Tone @ 2.90 (UT200X 2.9%) Additional medicare @ 0.9% (47200X0.9%) 424.8 Total tax cash after tax (47200- 18313-6) 28886.4 12le 18 3136

Alternative - I (c- corporation] poroticulass. . Net income before trees Tase on income @ 21% (59000821%) Corporation fate rate @212 Income after taxes amount (&) 59000 (12390) 46610 Tore on dividends @ 15%(46610x157.) 6991.5 Net investment tore @ 36% (46610X 3.8%) 1771.18 8762.68 cash after taxes (46610-8762.68). 37847.32 (b) overall ford rate & ILLC 7 overall tax rate - Total taxe Overall tax rate & -X100 Net income before taxes (8313.6 -xloo 59000 = 31.04r. c corporation.) rato - Total tan Net income before trees 12390+6991-5+1771-18 59000 = 35.86% overrall tax