Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company. Each business generated $500,000 of taxable income and before-tax cash flow. A Corporation and B Company produce a product, but C Company provides accounting services. A Corporation will distribute $200,000 of its after-tax income to Albert. All three owners face a 37% marginal tax rate on ordinary income. B Company qualifies for the § 199A deduction, but C Company does not because it provides accounting services and its taxable income exceeds the threshold for that deduction.
Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company. Each business generated $500,000 of taxable income and before-tax cash flow. A Corporation and B Company produce a product, but C Company provides accounting services. A Corporation will distribute $200,000 of its after-tax income to Albert. All three owners face a 37% marginal tax rate on ordinary income. B Company qualifies for the § 199A deduction, but C Company does not because it provides accounting services and its taxable income exceeds the threshold for that deduction.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
- Albert owns 100% of A Corporation, Betty is the sole proprietor of B Company, and Cai is the sole proprietor of C Company.
- Each business generated $500,000 of taxable income and before-tax
cash flow . - A Corporation and B Company produce a product, but C Company provides accounting services.
- A Corporation will distribute $200,000 of its after-tax income to Albert.
- All three owners face a 37% marginal tax rate on ordinary income.
- B Company qualifies for the § 199A deduction, but C Company does not because it provides accounting services and its taxable income exceeds the threshold for that deduction.
Assume the tax rate applied to dividend income equals the top 20% net long-term
What will be the values of A Corporation, B Company, and C Company after three years? Assume that each business (a) required a $5,000,000 initial investment, (b) earns an annual 10% before-tax
Transcribed Image Text:A Corporation
$5,000,000
B Company
$5,000,000
C Company
$5,000,000
500,000
Texable income to owners in year 1
200,000
400,000
After-tax cash flow for year 1
347,400
352,000
315,000
Investment at the end of year
5,347,400
5,352,000
5,315,000
Texable income to owners in year 2
200,000
428,160
531,500
After-tax cash flow for year 2
189,000
376,781
334,845
Investment at the end of year 2
5,725,400 X
5,738,781
5,649,845
Taxable income to owners in year 3
200,000
458,302
564,983
After-tax cash flow for year 3
189,000
403,306
355,940
Investment at the end of year 3
6,136,702
6,132,087
6,005,785
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