Sandra 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 11 percent annual before-tax return on a $640,000 investment. Sandra'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 Sandra 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. BAL's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that BAL will distribute all 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.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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[The following information applies to the questions displayed below.]
Sandra 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 11 percent annual before-tax return on a $640,000 investment. Sandra'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 Sandra 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. BAL's income is not qualified business
income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that BAL will distribute all 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.)
a. How much cash after taxes would Sandra receive from her investment in the first year if BAL is organized as either an LLC or a C
corporation?
LLC
C corporation
After-tax cash
flow
b. What is the overall tax rate on BAL's income in the first year if BAL is organized as an LLC or as a C corporation? (Round your final
answers to 2 decimal places.)
Overall Tax Rate
LLC
C corporation
%
Transcribed Image Text:Required information [The following information applies to the questions displayed below.] Sandra 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 11 percent annual before-tax return on a $640,000 investment. Sandra'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 Sandra 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. BAL's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that BAL will distribute all 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.) a. How much cash after taxes would Sandra receive from her investment in the first year if BAL is organized as either an LLC or a C corporation? LLC C corporation After-tax cash flow b. What is the overall tax rate on BAL's income in the first year if BAL is organized as an LLC or as a C corporation? (Round your final answers to 2 decimal places.) Overall Tax Rate LLC C corporation %
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