Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is
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- Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company.
- Each business generated $500,000 of taxable income and before-tax cash flow.
- A Corporation and B Company produce a product, but C Company provides accounting services.
- A Corporation will distribute all of its after-tax income to Albert.
- All three owners face a 37% marginal tax rate on ordinary income.
- B Company qualifies for the § 199A deduction, but C Company does not because it provides accounting services and its taxable income exceeds the threshold for that deduction.
Assume the tax rate applied to dividend income equals the top 20% net long-term capital gain rate plus the 3.8% net investment income tax rate. The corporate tax rate is 21% and § 199A deduction is 20%.
What will be the values of A Corporation, B Company, and C Company after three years? Assume that each business can reinvest its after-tax cash flow back into the business and that there is no unrealized appreciation of their assets.
A Corp | B Corp | C Corp | |
---|---|---|---|
Initial investment | 5,000,000 | 5,000,000 | 5,000,000 |
Taxable income to owners in year 1 | |||
After-tax cash flow for year 1 | |||
Investment at end of year 1 | |||
Taxable income to owners in year 2 | |||
After-tax cash flow for year 2 | |||
Investment at end of year 2 | |||
Taxable income to owners in year 3 | |||
After-tax cash flow for year 3 | |||
Investment at end of year 3 |
Related Book For
Concepts in Federal Taxation
ISBN: 9780324379556
19th Edition
Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher
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