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. Sandras marginal income tax rate is 37 percent, and her tax rate on qualified dividends and net capital gains is 20 percent. LABs 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 earnings every year. Ignore the additional Medicare Tax and the net investment income tax when computing your answers.

NOTE: ROUND YOUR INTERMEDIATE COMPUTATIONS TO THE NEAREST WHOLE DOLLAR AMOUNT.

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?

after cash flow

S Corporation ___________________________

C Corporation____________________________

b. What is the overall tax rate on LABs income in the first year if LAB is organized as an S Corporation or as a C corporation?

Round your final answers to 2 decimal places

OVERALL TAX RATE

S Corporation __________%

C Corporation__________%

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