Sandra would like to organize LAB as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form,
Posted: Wed Jul 06, 2022 6:40 pm
Sandra would like to organize LAB as either an LLC (taxed as asole proprietorship) or a C corporation. In either form, the entityis expected to generate an 11 percent annual before-tax return on a$640,000 investment. Sandra’s marginal income tax rate is 37percent, and her tax rate on dividends and capital gains is 23.8percent (including the 3.8 percent net investment income tax). IfSandra organizes LAB as an LLC, she will be required to pay anadditional 2.9 percent for self-employment tax and an additional0.9 percent for the additional Medicare tax. LAB’s income is notqualified business income (QBI) so Sandra is not allowed to claimthe QBI deduction. Assume that LAB will distribute all of itsafter-tax earnings every year as a dividend if it is formed as a Ccorporation. (Round your intermediate computations to the nearestwhole dollar amount.) a. How much cash after taxes would Sandrareceive from her investment in the first year if LAB is organizedas either an LLC or a C corporation? b. What is the overall taxrate on LAB’s income in the first year if LAB is organized as anLLC or as a C corporation? (Round your final answers to 2 decimalplaces.)