Mackenzie is considering conducting her business, Mac561, as either a single member LLC or an S corporation. Assume her marginal ordinary income tax r
Mackenzie is considering conducting her business, Mac561, as either a single member LLC or an S corporation. Assume her marginal ordinary income tax rate is 37 percent, her marginal FICA rate on employee compensation is 1.45 percent, her marginal self-employment tax rate is 2.9 percent (her other self-employment income and/or salary exceeds the wage base limit for the 12.4 percent Social Security tax portion of the self-employment tax), and any employee compensation or self-employment income she receives is subject to the .9 percent additional Medicare tax. Also, assume Mac561 generated $200,000 of business income before considering the deduction for compensation Mac561 pays to Mackenzie and Mackenzie can claim the full qualified business income deduction on Mac561’s business income allocated to her. Determine Mackenzie’s after-tax cash flow from the entity’s business income and any compensation she receives from the business under the following assumptions:
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a. Mackenzie conducted Mac561 as a single-member LLC.
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b. Mackenzie conducted Mac561 as an S corporation and she received a salary of $100,000. All business income allocated to her is also distributed to her.
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| \r\n \r\n | \r\n\r\n Amount \r\n | \r\n\r\n Description \r\n | \r\n
| \r\n (1) Business income before comp. \r\n | \r\n\r\n $200,000 \r\n | \r\n\r\n \r\n | \r\n
| \r\n (2) Salary \r\n | \r\n\r\n (100,000) \r\n | \r\n\r\n \r\n | \r\n
| \r\n (3) FICA deduction \r\n | \r\n\r\n (1,450) \r\n | \r\n\r\n (2) × .0145 employer’s portion \r\n | \r\n
| \r\n (4) Business income allocation and distribution to owner \r\n | \r\n\r\n 98,550 \r\n | \r\n\r\n (1) + (2) + (3) \r\n | \r\n
| \r\n (5) QBI deduction \r\n | \r\n\r\n (19,710) \r\n | \r\n\r\n (4) × 20% \r\n | \r\n
| \r\n (6) Net taxable business income \r\n | \r\n\r\n 78,840 \r\n | \r\n\r\n (4) + (5) \r\n | \r\n
| \r\n (7) Income tax on net business income \r\n | \r\n\r\n (29,171) \r\n | \r\n\r\n (6) × .37 \r\n | \r\n
| \r\n (8) Salary received \r\n | \r\n\r\n 100,000 \r\n | \r\n\r\n (2) \r\n | \r\n
| \r\n (9) Income tax on salary \r\n | \r\n\r\n (37,000) \r\n | \r\n\r\n (8) × .37 \r\n | \r\n
| \r\n (10) Additional Medicare tax on salary \r\n | \r\n\r\n (900) \r\n | \r\n\r\n (8) × .009 \r\n | \r\n
| \r\n (11) FICA tax paid \r\n | \r\n\r\n (1,450) \r\n | \r\n\r\n (2) × .0145 employee’s portion \r\n | \r\n
| \r\n After-tax cash flow \r\n | \r\n\r\n $130,029 \r\n | \r\n\r\n (4) + (7) + (8) + (9) + (10) + (11) \r\n | \r\n
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c. Mackenzie conducted Mac561 as an S corporation and she received a salary of $20,000. All business income allocated to her is also distributed to her.
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| \r\n \r\n | \r\n\r\n Amount \r\n | \r\n\r\n Description \r\n | \r\n
| \r\n (1) Business income before comp. \r\n | \r\n\r\n $200,000 \r\n | \r\n\r\n \r\n | \r\n
| \r\n (2) Salary \r\n | \r\n\r\n (20,000) \r\n | \r\n\r\n \r\n | \r\n
| \r\n (3) FICA deduction \r\n | \r\n\r\n (290) \r\n | \r\n\r\n (2) × .0145 employer’s portion \r\n | \r\n
| \r\n (4) Business income allocation and distribution to owner \r\n | \r\n\r\n 179,710 \r\n | \r\n\r\n (1) + (2) + (3) \r\n | \r\n
| \r\n (5) QBI deduction \r\n | \r\n\r\n (35,942) \r\n | \r\n\r\n (4) × 20% \r\n | \r\n
| \r\n (6) Net taxable business income \r\n | \r\n\r\n 143,768 \r\n | \r\n\r\n (4) + (5) \r\n | \r\n
| \r\n (7) Income tax on net business income \r\n | \r\n\r\n (53,194) \r\n | \r\n\r\n (6) × .37 \r\n | \r\n
| \r\n (8) Salary received \r\n | \r\n\r\n 20,000 \r\n | \r\n\r\n (2) \r\n | \r\n
| \r\n (9) Income tax on salary \r\n | \r\n\r\n (7,400) \r\n | \r\n\r\n (8) × .37 \r\n | \r\n
| \r\n (10) Additional Medicare tax on salary \r\n | \r\n\r\n (180) \r\n | \r\n\r\n (8) × .009 \r\n | \r\n
| \r\n (11) FICA tax paid \r\n | \r\n\r\n (290) \r\n | \r\n\r\n (2) × .0145 employee’s portion \r\n | \r\n
| \r\n After-tax cash flow \r\n | \r\n\r\n $138,646 \r\n | \r\n\r\n (4) + (7) + (8) + (9) + (10) + (11) \r\n | \r\n
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d. Which entity/compensation combination generated the most after-tax cash flow for Mackenzie? What are the primary contributing factors favoring this combination?
