Question

[The following information applies to the questions displayed below. Sandra would like to organize LAB 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 $720,000 investment. Sandra'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 Sandra organizes LAB 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. LAB's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its after-tax earnings every year as a dividend if it is formed as a C 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 if LAB is organized as either an LLC or a C corporation? Answer is not complete. After-tax cash flow LLC $ 42,624 X

Answer 1

Answer (@) LLC colporation page: 01 * 10:1 pretax earnings $ 720000 $ 12000 $92000 x 0%. = 40 $72000 For 501. of SE fax Entity level tax rate = 0). Earnings after entity level - pretax earning - enlity level taxe fntity level tax - = $72000-0 $72000 x 0.9235 x 22.9%, X50'). 964 net income taxable to Owney 72000 - 964 = $71036 Income tax paid by owner = $71036 x 37%. = $ 26283 self employment tax - 72000 x 0.923542.9.1. = $ 1928 additional medicare tax (01) net investment in income tax = 72000 X 0.9235 X 0.9.8. -4598 = $26283+ $1928 + $598 = 4 28809 Aften tar cash flow = 492000 – $28809 = 43191 llc corporation, after tax cash flow = 43191 C Wolporation pretar ernings = 120000 x1Q .l. = $ 72000 entity level tax date = 21% entity level tax +72000 X 211. 415120 tornings after entity level tac- $ 72000 - $ 15120 net income taxable to owner $ 56880 ownen = 436880X20. ( 23.84.70389 $11376 Ownen level tax tax paid by Income

Addikonal medicone fax Coril net investment page.oz $56880 X 3.84 = $2161 income tax owner level tox $11376+ $2161 #13537 Aften tax cash flow = 456880 - $13537 = $43343 c corporation after tax cash flow = $ 43343 Owner level tax overall tax rate pretax Barnings #288096472000 X100 o Le corporation 40.01.1 lic corporation overall tax rate 140.011. a wirporation Overall tax rate 13537 +15120 X 106 72000 28657 X 106 72000 39.80.1, Cooperation overall tax rate 39.801