David Would Like to Organize HOS (A Business Entity)as Either

question 59

Essay

David would like to organize HOS (a business entity)as either an S corporation or as a corporation (taxed as a C corporation)generating a 12 percent annual before-tax return on a $300,000 investment.David's marginal tax rate is 24 percent and the corporate tax rate is 21 percent.David's marginal tax rate on individual capital gains and dividends is 15 percent.HOS will pay out its after-tax earnings every year to either its members or its shareholders.If HOS is taxed as an S corporation, David's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business), and the business income allocation would qualify for the deduction for qualified business income.
a.How much would David keep after taxes if HOS is organized as either an S corporation or a C corporation?
b.What are the overall tax rates (combined owner and entity level)if HOS is organized as either an S corporation or a C corporation?

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Definitions:

Equity Securities

Financial instruments indicating ownership in a corporation, such as stocks, and often yielding dividends.

Similarities

Aspects or characteristics that are alike between two or more entities or objects.

Consolidated Financial Statements

Financial statements that show the combined financial position and results of operations of a parent company and its subsidiaries.

Combined Reporting

A method used in corporate taxation that combines the tax reports of related companies into one comprehensive report.