Its 2020 and you are the owner/operator of a bakery called CakeShack that generates $500,000 in yearly operating income. After running your business for several years, you want to evaluate the implications of your organizational form, financing choice, and investment positions. Because of differences in personal liability and tax treatments, you want to understand the trade-offs between organizing your business as a sole proprietorship versus a corporation. From the beginning, you have financed your business operations using all equity,but now want to consider a mix of 70% equity and 30% debt financing. If your business uses debt, it will have a yearly interest expense of $20,000. In addition to the operating income, your business receives $10,000 in qualified corporate dividend income from a joint venture in Cake Bakers Club and $5,200 in interest income from a bond investment. You are the only owner of your business and the business income is your sole source of personal income. Using the 2020 tax tables below, calculate the total tax liability on all of Cake Shacks income, both as a sole proprietorship and a corporation, if it's financed using 100% equity versus 60% equity and 40% debt.

(Hint: find the total tax liability for each of four scenarios.)

2020 Tax Rate Schedule for Individual Taxpayer:

Taxable Income Brackets	Tax Rate
$0 to $9,875	10%
$9,876 to $40,125	12%
$40,126 to $85,525	22%
$85,526 to $163,300	24%
$163,301 to $207,350	32%
$207,351 to $518,400	35%
$518,401 to Unlimited	37%

2020 Corporate Tax Rate: 21%

2020 Federal Long-Term Capital Gains Tax Rates and Income Brackets:

Tax Rate	Individual Taxpayer Income	Joint Taxpayer Income
0%	$40,000	$80,000
15%	$441,450	$496,000
20%	Unlimited	Unlimited

2020 Federal Net Investment Income Tax Rate and Income Bracket:

Tax Rate	Individual Taxpayer Income	Joint Taxpayer Income
3.8%	$200,000	$250,000

Investment income is subject to the net investment income tax when total income (or adjusted gross income) is above the limit, at which point the less of the total income above the limit or the investment income is subject to the tax.