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 a $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 UTA’s business activities, the income from UTA will not be subject to the net investment income tax. Assume that UTA will pay out 100 percent 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 Tremaine receive from his investment in the first year if UTA is organized as either an S corporation or a C corporation?

b. What is the overall tax rate on UTA’s income in the first year if UTA is organized as an S corporation or as a C corporation? (Round your final answers to 1 decimal place.)

Answer 1

Ans :-(a)

Computatio of Cash after taxes would Tremaine receive from his investment in the first year if UTA is organized as either an S corporation or C corporation are as follows:-

Particulars	S corporation	C corporation
(1) pre-tax earnings	$ 90,000 ( 9%* 1,000,000)	$ 90,000 ( 9%* 1,000,000)
(2) entity level tax	0	$ 33,300 [(1)*37%]
(3) after-tax entity earnings	$ 90,000 [(1)-(2)]	$ 56,700 [(1)-(2)]
(4) owner tax	$ 33,300 [(3)*37%]	$ 13,495 [(3)* 23.8%]
(5) after-tax earnings	$ 56,700 [(3)-(4)]	$ 43,205 [(3)-(4)]

Ans:- (b)

Computation of the overall tax rate on UTA's income in the first year if UTA is organized as an S corporation or as a C corporation are:

Particular	S corporation	C corporation
Overall tax rate	37% [(4)/(1)] Refer above table	52% [(2)+(4)] / (1)] Refer above table