Calculate the tax disadvantage to organizing a U.S. business as a corporation versus a partnership, given...
Calculate the tax disadvantage to organizing a U.S. business as a corporation versus a partnership, given the following assumptions. All earnings will be paid out as dividends, and operating income before taxes will be $1,869,564. The effective corporate tax rate is 21%, and the tax rate on corporate dividends is 15%. The average personal tax rate for partners in the business is 31%.
Homework Answers
Net Income After Tax in the hands of partners:
For Corporate:
(EBIT - Corporate Tax)/(1+Corporate Dividends Tax Rate)
= (1869564 - 21%)/(1+0.15)
= 1476955.56/1.15 = 1284309.1826
For Partnership:
EBIT - Tax
1869564 - 31% = 1289999.16
Therefore, Tax Disadvantage for Corporate = Income as per Partnership - Income as per Corporate
= 1289999.16 - 1284309.1826 = 5689.5774
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