Question

This question was answered but I can't read the handwriting it was answered in, was hoping I could get a readable version of the answer.

Q 5-16: 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 quality for the QBI deduction.

C. A pass-through that does qualify for the QBI deduction.

Answer 1

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

before tcja the maximum combined effective federal income tax rate is this situtation is

35%+((20%+37%)*(100%-35%)

=50.4%

but after tcja maximum combined effective federal income tax rate is

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

=39.72%

tcja is a major tax 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 deductions etc would vary according to different orgnaisational forms . lets understand it by the following example

pre taxable income =100

c Corporation

tax rate of c corporation is 21%

before tcja tax rate on c corporation was 35%

but in the above case c corporation pays out all after tax earnings as dividened to its stake holders

2) pass throught does not qualify for qbi deduction

taxable income 100

no qbi deduction

pay tax on 100%of the income

3) pass through qualify for qbi

taxable income 100

qbi deduction for 20% of income

taxable = 100-(100*20%)

=80

pay tax on 80% of the income

before the tcja act net taxable income from pass throgh business entities sole proprietorship , partnership and llp companies treated as sole prop or partnership for tax purpose and s corporation was simply passed through to the individual owners and taxed on form 1040 at the owners personal rates

for tax year beginning is 2018 through 2025, the tcja allows a deduction for individual owners of those pass through entities based on their income share of qualified business income from those entities. the deduction can be utpo 20% of qbi subject to restrictions that can apply at higher income levels

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