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Andrea would like to organize SHO as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 11 percent annual before-tax return on a $200,000 investment. Andrea’s marginal income tax rate is 35 percent and her tax rate on dividends and capital gains is 15 percent. Andrea will also pay a 3.8 percent net investment income tax on dividends and capital gains she recognizes. If Andrea organizes SHO as an LLC, Andrea 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. Further, she is eligible to claim the deduction for qualified business income. Assume that SHO will pay out all of its after-tax earnings every year as a dividend if it is formed as a C corporation. a. How much cash after taxes would Andrea receive from her investment in the first year if SHO is organized as either an LLC or a C corporation? (Round intermediate calculations and your final answers to the nearest whole dollar.)

Answer :

Answer: The answer is given below

Explanation:

After-tax return is the percentage on an investment's return after tax expense has been deducted from the return that is earned.

The following can be derived from the information given in the question:

• SHO is a LLC

Gross return = 200,000 X 11%

= 200,000 × 0.11

= 22,000

Marginal tax at 35% = 22,000 X 35%

= 22000 × 0.35

= 7,700

Return before dividend tax:

= 22000 - 7700

= 14,300

Self employment tax at 2.9%:

= 14,300 X 2.9%

= 14300 × 0.029

= 414.7

Medicare tax at 0.9%

= 14,300 X 0.9%

= 128.7

Cash return after tax:

= 14300 - 414.7 - 128.7

= $13756.6

• SHO is a C corporation:

Gross return = 200,000 X 11%

= 200,000 × 0.11

= 22,000

Marginal tax at 35% = 22,000 X 35%

= 22,000 × 0.35

= 7,700

Return before dividend tax:

= Gross return - Marginal tax

= 22000 - 7700

= 14300

Dividend tax = 14,300 X 15%

= 14,300 × 0.15

= 2,145

Cash Return after tax:

= 14300 - 2145

= $12,155

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