Question
A taxpayer capitalizes a wholly owned corporation with $100,000. The corporation invests in a project that earns an annual pretax rate of return of 15%
A taxpayer capitalizes a wholly owned corporation with $100,000. The corporation invests in a project that earns an annual pretax rate of return of 15% and faces a 15% corporate tax rate. The taxpayer faces a personal tax rate of 39.6% and expects to liquidate the corporation after 20 years.
a. What is the after-tax rate of return on this investment?
b. Do you recommend that the taxpayer make this investment via an S corporation to avoid double taxation? Assume the corporation distributes enough cash to the taxpayer each year to allow him to pay his taxes on the S corporation income.
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Taxes And Business Strategy A Planning Approach
Authors: Myron Scholes, Mark Wolfson, Merle Erickson, Michelle Hanlon
5th Edition
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