Question

Required information [The following information applies to the questions displayed below.] 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.) rev: 09_03_2018_QC_CS-135733 d. What is the overall tax rate on UTA’s income if UTA’s income is not qualified business income and Tremaine is a passive investor in UTA?

Answer 1

If UTA is form as S corporation
Return for Tremaine - 9%*1000000				90000
Less : Deduction for qualified business income @ 20%				18000
Adjusted Return				72000
Tax @ 37%				26640
Cash after taxes for S corporation				45360
If UTA is form as C corporation
Return for Tremaine - 9%*1000000				90000
Less : Tax @ 37%				33300
After tax entity earnings				56700
Owner tax @ 20%				11340
(23.80%-3.80%)
Cash after taxes for C corporation				45360
Net Investment income tax rate is 3.80%