Question

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 11 percent annual before-tax return on a $200,000 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 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.

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?

Answer 1

as LLC. |-Amount (in 1) 22000 (1,700) a) If. sko organised Particulars Retwin. C200000 x 11 14 %.) (- Marginal Tau @ 35% (22000x354). Balance before dividend Sulf employment I am @2.07. €14300 x 2.9%) Medicare Tau @ 0,9%. C14300 x0,901.). 16,300 tau (414.ro) (128.70) Net Cash Return after 13,7563/ ( Tames, Total Tames incurred, 8243, 40, Overall Tam Rate 8 243.40 M100 = 37.47°), 22000 Notel. Net investment income tau on dividende and capital gains of 3.8% ie not applicable. Note 2: As per assumption there was no payout so Tau Rate on dividends & capital gains of 15% is not applicable 18

b) If Sho organised Particulars an Corporation Around Gir 1) 23000 سر - (1,700) 14,300 Return (200000 11°/0) 6) Marginal Tau @ 35 %. ( 22000* 35).) Balance beforedividend tom. (-) Dividend Tau. Cth 300 y.) Net Cash Return after Tanes Total Tames incurred. (2,145) 12,155 /- 9845 Overall Tau Rate = 9845 40o = 44.75% 22000 Notei. Net investment encome tan on dividende ( and capital gains of 3.8% is not applicable. . Self Employment ment tan & Medicare Tam is not applicable since SHO is not ille. Note ai