Question

How did the TCJA alter the relative preferences in terms of organizational form? Illustrate this using a simple example where a business has pretax taxable income of $100 and operates:

a. A C corporation subject to a 21% tax rate, that pays out all after-tax earnings as dividends, and in which the shareholders are all taxable at 20% on qualified dividends and 37% on ordinary income

b. A pass-through that does not qualify for the QBI deduction

c. A pass-through that does qualify for the QBI deduction Tax-Planning Problems

Answer 1

shareholder pay tax @20% on qualified dividened and tax @37% on ordinary income

before tcja the maximum combined effective federal income tax rate in this situation is as follows

35%+(20%+375)-(100%-35%)

=50.40%

but after tcja max combiend effective tax rate is

21%+(20%+37%)+(100%-21%)

=39.72%

tcja is a major legislation that will affect individuals, business , tax exempt and government entities tcja alters relative preferences in terms of organisational forms . tax rates eligible deductions and standard deduction etc woud vary according to different organisational forms

pre tax income = 100

C corporation

tax rate for c corporation is 21%

before tcja the rate on c corporation was 35%

in this case c corporation pays out all after tax earnings as dividened to the shareholders

2) pass throught does not qualify for qbi deduction

taxabel income 100

no qbi deduction

pay tax on 100% of the income

3) pass through qualify for qbi deduction

taxabel income 100

qbi deduction is 20% of income

taxable income = 100-(20%*100)

=80

pay tax on 80 % of the income

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