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

question 33

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 39.6%. 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) $115,406 total tax cost
• D) $118,800 total tax cost

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Definitions:

Lymph Capillary

Tiny, thin-walled vessels located in the spaces between cells which serve to drain and transport lymph from tissues to the lymphatic system.

Blood Capillary

The smallest blood vessels in the body, connecting arterioles to venules and facilitating the exchange of water, oxygen, carbon dioxide, and many other nutrient and waste chemical substances between blood and surrounding tissues.

Vena Cava

Large systemic vein that returns blood to the right atrium of the heart in tetrapods; either the superior or inferior vena cava.

Antihistamine

A type of medication that blocks histamine receptors and is used to treat allergic reactions by reducing symptoms like nasal congestion, sneezing, or itching.