Question

Mackenzie is considering conducting her business, Mac561, as either a single member LLC or as an S corporation. Determine Mackenzie’s after-tax cash flow from the entity’s business income and any compensation she receives from the business assuming her marginal ordinary income tax rate is 37 percent, her marginal FICA rate on employee compensation is 1.45 percent, her marginal self-employment tax rate is 2.9 percent, and any employee compensation or self-employment income she receives is subject to the .9 percent additional Medicare tax. Finally, Mac561 generated $220,000 of business income before considering the deduction for compensation Mac561 pays to Mackenzie and Mackenzie can claim the full qualified business income deduction on Mac561’s business income. Mackenzie conducted Mac561 as an S corporation and she received a salary of $100,000. All business income allocated to her is also distributed to her. What is the after-tax cash flow?

Answer 1

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		S Corp.	Description
1.	Business income before Mackenzie’s salary	220000
2.	Salary	100000
3.	Entity level taxable income	120000
4.	Entity level tax rate	0%
5.	Entity level tax	0
6.	Earnings after-entity-level tax	120000	(3) – (5)
7.	QBI deduction	(24000)	(6) x 20%
8.	Deduction for 50 percent of FICA tax	(1450)	100000*2.90%*50%
9.	Net income taxable to owner	94550	(6) + (7) + (8)
10.	Income tax on net business income	(34984)	(9) × 0.37
11.	Salary received	100000
12.	Income tax on salary	(37000)	100000**37%
13.	FICA taxes paid	(1450)	(9)+(10)+(11)+(12)+(13)
	After-tax cash flow	$121116

answered by: anonymous