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
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. Amy used the following assumptions to make her calculations:
\r\na) 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.
\r\nb) All entities would use the cash method of accounting.
\r\nc) 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% FICA tax on her salary and SHO will also pay 7.65% FICA tax on Amy’s salary (the FICA tax paid by the entity is deductible by the entity).
\r\nd) 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.
\r\ne) Amy’s marginal self-employment tax rate 15.3 percent.
\r\nf) 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 income are over the threshold for the tax).
\r\ng) Amy pays a 3.8 percent net investment income tax on dividends and net capital gains (i.e., AGI on joint tax return is over threshold by more than any net investment income she receives).
\r\nh) 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.
\r\ni) 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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Required:
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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.
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| \r\n Cash flow \r\n | \r\n\r\n LLC \r\n(Sole prop) \r\n | \r\n\r\n S \r\ncorporation \r\n | \r\n\r\n C \r\ncorporation \r\n | \r\n
| \r\n Business income \r\n | \r\n\r\n $22,000 \r\n | \r\n\r\n $22,000 \r\n | \r\n\r\n $22,000 \r\n | \r\n
| \r\n FICA taxes paid by Amy \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n FICA taxes paid by SHO \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Self-employment tax paid by Amy \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Federal income tax paid by SHO \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Additional Medicare tax paid by Amy \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Net investment income tax paid by Amy \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Federal income tax paid by Amy* \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
| \r\n Cash remaining after-taxes \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n\r\n \r\n | \r\n
*Remember to consider account flow-through income, qualified dividends, the self-employment tax deduction, and the qualified business income deduction in thecalculation.
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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 explanation).
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