Loretta Plans to Start a Small Business, Operated Through a Corporation

question 63

Multiple Choice

Loretta plans to start a small business, operated through a corporation. In year 0, she expects the corporation to generate a loss of $100,000. Subsequently, she expects the corporation to be profitable, and projects profit of $150,000 in year 1, and $250,000 in year 2. Loretta's personal marginal tax rate on ordinary income is 35%. Using a 10% discount rate, calculate the present value of expected tax savings and costs on the business earnings for the first 3 years of operations if the business does not make an S corporation election.

• A)$73,518 total tax cost
• B)$88,250 total tax cost
• C)$102,000 total tax cost
• D)$105,000 total tax cost