Question

______     6.      You are trying to decide whether to run your business as a corporation or as an individual owner (for example, as a “sole proprietorship”). One of the factors is the problem of double taxation. Assume that the corporate income tax rate is 35%, the individual income tax rate on dividend income is 15%, and the individual income tax rate on other income is 39.6%. (Note – use these tax rates. Don’t use the actual tax rate schedule.) The business is expected to generate $625,000 of taxable income. Similar to the example given in class, assume that the amount of dividend income is equal to the corporate after-tax cash flow. How much more after-tax cash flow will you have if you run the business as a sole proprietorship rather than as a corporation? Hint: fill out the following table to help answer the question.

Operated as corporation		Individual owner
Corporation		Individual
Cash Revenue	$825,000	Cash Revenue	$825,000
Cash Expenses	$200,000	Cash Expenses	$200,000
Taxable Income	$625,000	Taxable Income	$625,000
Corporate Income Tax (35%)		Individual Income Tax (39.6%)
Net Income		After-tax net cash flow
Stockholder
Dividend Income
Individual Income Tax (15%)
After-tax net cash flow

______     7.      You are trying to decide whether to run your business as a corporation or as an individual owner (for example, as a “sole proprietorship”). One of the factors is the problem of double taxation. Assume that the corporate income tax rate is 35%, the individual income tax rate on dividend income is 15%, and the individual income tax rate on other income is 39.6%. (Note – use these tax rates. Don’t use the actual tax rate schedule.) The business is expected to generate $720,000 of taxable income. Similar to the example given in class, assume that the amount of dividend income is equal to the corporate after-tax cash flow. How much more after-tax cash flow will you have if you run the business as a sole proprietorship rather than as a corporation? Hint: fill out the following table to help answer the question.

Operated as corporation		Individual owner
Corporation		Individual
Cash Revenue	$900,000	Cash Revenue	$900,000
Cash Expenses	$180,000	Cash Expenses	$180,000
Taxable Income	$720,000	Taxable Income	$720,000
Corporate Income Tax (35%)		Individual Income Tax (39.6%)
Net Income		After-tax net cash flow
Stockholder
Dividend Income
Individual Income Tax (15%)
After-tax net cash flow

Answer 1

6.

Operated as corporation		Individual owner
Corporation		Individual
Cash Revenue	825,000.00	Cash Revenue	825,000
Cash Expenses	200,000.00	Cash Expenses	200,000
Taxable Income	625,000.00	Taxable Income	625,000
Corporate Income Tax @35%	218,750.00	Individual Income Tax@ 39.6%	247,500
Net Income	406,250.00	After tax net cash flow	377,500
Stockholder
Dividend Income	406,250.00
Individual Income Tax @15%	60,937.50
After tax net cash flow	345,312.50

After-tax cash flow I will have more if I run the business as a sole proprietorship rather than as a corporation

= 377500 - 345312.50 = $ 32,187.50

7)

Operated as corporation		Individual owner
Corporation		Individual
Cash Revenue	900,000.00	Cash Revenue	900,000.00
Cash Expenses	180,000.00	Cash Expenses	180,000.00
Taxable Income	720,000.00	Taxable Income	720,000
Corporate Income Tax @35%	252,000.00	Individual Income Tax@ 39.6%	285,120
Net Income	468,000.00	After tax net cash flow	434,880
Stockholder
Dividend Income	468,000.00
Individual Income Tax @15%	70,200.00
After tax net cash flow	397,800.00

After-tax cash flow I will have more if I run the business as a sole proprietorship rather than as a corporation

=434880 - 397800 = $37,080