Required: a) Fill in the cells in the table below to identify cash flows associated with the income from the business if the business is formed as an LLC (sole proprietorship), S corporation, or C corporation for tax purposes. Enter cash outflows as negative numbers. Page 4-50 Cash flow LLC (Sole prop) $22,000 S Corporation C Corporation $22,000 $22,000 Business income FICA taxes paid by Amy FICA taxes paid by SHO Self-employment tax paid by Amy Federal income tax paid by SHO Additional Medicare tax paid by Amy Net investment income tax paid by Amy Federal income tax paid by Amy* Cash remaining after taxes *Remember to consider account flow-through income, qualified dividends, the self-employment tax deduction, and the qualified business income deduction in calculation. b) At a high level, describe the factors causing differences in the after-tax cash flows from each entity, given that the before-tax cash flows are the same (don't use dollar amounts in the explanation). Page 4-51 Business income Compensation (salary) Individual FICA Rate (1) FICA taxes paid by Amy (2) FICA taxes paid by SHO Business taxable income Entity level income tax rate (3) Federal income tax paid by SHO Self-employment income Self-employment tax rate (4) Self-employment tax paid by Amy Additional Medicare tax rate (5) Additional Medicare tax paid by Amy Taxable investment income Net investment income tax rate (6) Net investment income tax paid by Amy Individual ordinary taxable income Taxable business income Compensation (salary) SE Tax Deduction QBI Deduction Individual taxable income Individual income tax rate Tax on Ordinary Income Dividend Income Dividend tax rate Tax on Dividend Income (7) Federal income tax paid by Amy (8) Cash remaining after taxes LLC (Sole proprietor) S C corporation corporation
Amy is evaluating the cash flow consequences of organizing her business entity SHO as an LLC (taxed as a sole proprietorship), an S
corporation, or a C corporation. She used the following assumptions to make her calculations:
a) For all entity types, the business reports $22,000 of business income before deducting compensation paid to Amy and payroll taxes
SHO pays on Amy's behalf.
b) All entities use the cash method of accounting.
c) If Amy organizes SHO as an S corporation or a C corporation, SHO will pay Amy a $5,000 annual salary (assume the salary is
reasonable for purposes of this problem). For both the S and C corporations, Amy will pay 7.65 percent FICA tax on her salary and
SHO will also pay 7.65 percent FICA tax on Amy's salary (the FICA tax paid by the entity is deductible by the entity).
d) Amy's marginal ordinary income tax rate is 35 percent, and her income tax rate on qualified dividends and net capital gains is 15
percent.
e) Amy's marginal self-employment tax rate is 15.3 percent.
f) Amy pays a 9 percent additional Medicare tax on salary and net earnings from self-employment (i.e., her salary and net earnings
from self-employment are over the threshold for the tax).
g) Amy pays a 3.8 percent net investment income tax on dividends and net capital gains (i.e., AGI on her joint tax return is over the
threshold by more than any net investment income she receives).
h) Assume that for purposes of the qualified business income deduction, the business income is not from a specified service and
neither the wage-based limitation nor the taxable income limitation applies to limit the deduction.
i) If SHO is formed as an S corporation or a C corporation, SHO will distribute all of its earnings after paying entity level taxes and after deducting salary and related FICA taxes paid to Amy.
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