Question

Sandra 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 11 percent annual before-tax return on a $730,000 investment. Sandra’s marginal income tax rate is 37 percent and her tax rate on dividends and capital gains is 23.8 percent (including the 3.8 percent net investment income tax). If Sandra organizes BAL as an LLC, she 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. BAL’s income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that BAL will distribute all of its after-tax earnings every year as a dividend if it is formed as a C corporation. (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 BAL is organized as either an LLC or a C corporation?

Answer 1

a. After Tax cash flow for LLC = $48,169
After Tax cash flow for C Corporation = $48,101

Computation of After tax Cash flow

Particulars	LLC	Basis	C Corporation	Basis
Pretax Earnings	$80,300	$730,000 X 11%	$80,300	$730,000 X 11%
Entity level tax rate	0%		21%
Entity level Tax	(0)	$80,300 X 0%	($16,863)	$80,300 X 21%
Earnings after entity level tax	$80,300	-	$63,437	$80,300-$16,863
Deduction for 50% SE tax	($1,075)	($80,300 X 92.35%) X 2.9% X 50%	0	0
Net income taxable to owner	$79,225	$80,300- $1,075	$64,437	-
Income tax paid by owner	($29,313)	$79,225 X 37%	($12,887)	$64,437 X 20%
Self employment Tax	($2,151)	($80,300 X 92.35%) X 2.9%	-	-
Additional Medicare	($667)	($80,300 X 92.35%) X 0.9%	-	-
Net investment Income tax	-	-	($2,449)	$64,437 X 3.8%
Total tax payable	($32,131)	$29313 + $2151 + $667	($15336)	$12887 + $2449
After Tax Cash Flow	$48,169	$80300 - $32131	$48,101	$64,437 -$15,336