Question

Andrea would like to organize SHO 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 $800,000 investment. Andrea’s marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent. Andrea will also pay a 3.8 percent net investment income tax on dividends and capital gains she recognizes. If Andrea organizes SHO as an LLC, Andrea will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Further, she is eligible to claim the deduction for qualified business income. Assume that SHO will pay out all of its after-tax earnings every year as a dividend if it is formed as a C corporation.

Problem 4-48 Part a (Algo)

a. How much cash after taxes would Andrea receive from her investment in the first year if SHO is organized as either an LLC or a C corporation? (Round intermediate calculations and your final answers to the nearest whole dollar.)

LLC= ?

C corporation= ?

b. What is the overall tax rate on SHO’s income in the first year if SHO is organized as an LLC or as a C corporation? (Round intermediate calculations to the nearest whole dollar. Round your final answers to 2 decimal places.)

LLC= ___%

C corporation=___%

Answer 1

Answer:

Part a:

S.No	Particulars	LLC	Description	C Corp	Description
(1)	Earnings before tax	$ 64,000	8% * 8,00,000	$ 64,000	8% * 8,00,000
(2)	Entity level tax rate	0%	-	21%	-
(3)	Entity level tax	0	-	13,440	(1) * 21%
(4)	Earnings after entity -level tax	$ 64,000	(1) - (3)	$ 50,560	(1) - (3)
(5)	QBI deduction	(12,800)	(4) * 20%	NA	-
(6)	Deduction for 50% of SE tax	(857)	(1) * 0.9235 * 0.029 * 0.50	NA	-
(7)	Net Income taxable to owner	50,343	(4) - (5) - (6)	$ 50,560	(4) didtributed as dividend
(8)	Income tax paid by owner	17,620	(7) * 0.35	7,584	(7) * 0.15
(9)	Self employment tax	1,714	(1) * 0.9235 * 0.029	NA	-
(10)	Additional Medicare tax/Net investment income tax	532	(1) * 0.9235 * 0.009 additional medicare tax	1,921	(7) * 0.038 net investment income tax
(11)	Owner level tax	19,866	(8) + (9) + (10)	9,505	(8) + (10)
(12)	After-tax cash flow	44,134	(1) - (11)	41,055	(7) - (11)
Part b:	LLC		C Corp
(13)	Overall tax rate	31.04%	(11) / (1)	35.85%	[(3) + (11)] / (1)