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Problem 15-46 (LO 15-3)

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Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Amanda’s marginal income tax rate is 37 percent and her tax rate on dividends and capital gains is 23.8 percent (including the 3.8 percent net investment income tax). If Amanda organizes BAL as an LLC, she will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. Also, she is eligible to claim a full deduction for qualified business income on BAL’s income. Assume that BAL will distribute half 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.)

Problem 15-46 Part a

a. How much cash after taxes would Amanda receive from her investment in the first year if BAL is organized as either an LLC or a C corporation?

Answer 1

A) 1)

Cash received by amanda if BAL if organised as an LLC:

Annual return on investment ($500000×8%)	$40000
Less: marginal income tax($40000×37%)	($14800)
Less: additional self employment and medicare tax [(2.9%+0.9%)×40000]	($1520)
After tax earning	$23680

2) cash received by amanda if BAL is organized as an c corporation:

Annual return on investment(800000×8%)	$40000
Less: marginal income tax (40000×37%)	($14800)
Earning after marginal income tax	$25200
Less:Tax at dividend tax rate (25200×20%(23.8%-3.8%))	($5040)
After tax earning	$20160

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