Question
12. Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity
12. Amanda 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 8 percent annual before-tax return on a $500,000 investment. Amanda's marginal income tax rate is 37 percent, and her tax rate on qualified dividends and net capital gains is 20%. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume the income is not eligible for the QBI deduction. Further, when computing your answers, include the self-employment tax (use a 2.9% marginal rate for self-employment income because Amanda has salary over $147,000 from her employer) but not the additional Medicare tax or the net investment income tax. a. How much cash after taxes would Amanda receive from her investment in the first year if BAL is organized as an LLC? What if BAL is organized as a C corporation? LLC ---? C corporation ---? 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? LLC-- % ? C coporation--- ?
14. Sandra would like to organize LAB (a legal corporation) as either an S corporation or a C corporation for tax purposes. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Sandra's marginal income tax rate is 37 percent and her tax rate on qualified dividends and net capital gains is 20 percent. 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 earnings after entity-level taxes every year. Ignore the additional Medicare tax and the net investment income tax when computing your answers. a. How much cash after taxes would Sandra receive from her investment in the first year if LAB is organized as either an S corporation or a C corporation? S Coporation--? C corporation --? b. What is the overall tax rate on LAB's income in the first year if LAB is organized as an S corporation or as a C corporation? S corporation-- % C corporation-- %
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