Question

Sandra 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 9 percent annual before-tax return on a $530,000 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 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. BAL's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that BAL 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.) 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? (Round your final answers to 2 decimal places.) Overall Tax Rate LLC C corporation

Answer 1

(A) Calculation of earnings after taxes if a firm is organized as either an LLC or as a C corporation:

Particulars	LLC ($)	Description	C Corp. ($)	Description
(1) Pre Tax earnings	47700	9% * $ 530000	47700	9% * $ 530000
(2) Entity Level Tax	NIL	-	7155	15% * $ 47700
(3) After tax entity earnings	47700	(1) - (2)	40545	(1) - (2)
(4) Owner Tax	16695	35% * $ 47700	8109	20% * $ 40545
(5) Net earnings	31005	(3) - (4)	32436	(3) - (4)

(B) Overall Tax Rate :

For LLC = 35% i.e. Owner tax / Pre tax earnings

For C Corp. = 32% i.e. (Entity level tax + Owner tax) / Pre tax earnings

Answer 2

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 8 percent annual before-tax return on a $530,000 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 full 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. (Do not round intermediate calculations and round your final answers to the nearest whole dollar.)