Question

Tremaine would like to organize UTA as either an S Corporation or a C corporation. In either form, the entity will generate a 9 percent annual before-tax return on an $1,000,000 investment. Tremaine’s marginal income tax rate is 37 percent and his tax rate on dividends and capital gains is 23.8 percent (including the net investment income tax). If Tremaine organizes UTA as an S corporation he will be allowed to claim the deduction for qualified business income. Also, because Tremaine will participate in UTAH’s business activities, the income from UTA will not be subject to the net investment income tax. Assume that UTA will pay out 25 percent of its after-tax earnings every year as a dividend if it is formed as a C corporation. (Do not round intermediate calculations and round your final answers to the nearest whole dollar.)

Answer 1

Answer:

Explanation:

Part A

S Corp.

Description

C corp.

Description

1.

Pretax earnings

90000

(1000000*9%)

90000

(1000000*9%)

2.

Entity level tax rate

0%

21%

3.

Entity level tax

0

18900

(1) × (2)

4.

Earnings after-entity-level tax

90000

(1) – (3)

71100

(1) – (3)

5.

QBI Deduction

(18000)

(1) × 0.20

NA

6.

Net income taxable to owner

72000

(4) + (5)

71100

(4) distributed as dividend

7.

Owner level marginal tax rate

37%

23.8%

8.

Owner-level tax

26640

(6) × (7)

16922

(6) × (7)

After-tax cash flow

63360

(1) – (8)

54178

(6) – (8)

B

Owner-level tax

26640

(6) × (7)

16922

(6) × (7)

After-tax cash flow

63360

(1) – (8)

54178

(6) – (8)

Overall tax rate

29.60%

(8)/(1)

39.80%

[(3) + (10)]/(1)