Question

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation? Group of answer choices $26,078 $20,332 $22,763 $19,006 $22,100

Answer 1

Answer:

$22,100

Explanation:

Calculation for the additional spendable income

First step is to find the Corporation Spendable income amount

Corporate taxes$340,000

($1,000,000*34%)

Income after corporate tax $660,000

($1,000,000-$340,000)

Tax on dividends $231,000

($660,000*35%)

Spendable income $429,000

($660,000-$231,000)

Second step is to find the Partnership Spendable income amount

Taxes paid by business $0

Income received by investors $1,000,000

Taxes paid by partners as personal income $350,000

($1,000,000*35%)

Spendable income $650,000

($1,000,000-$350,000)

Last step is to find the Difference between Corporation Spendable income amount and the Partnership Spendable income amount

Using this formula

Difference in Spendable income=Corporation Spendable income amount - Partnership Spendable income amount

Let plug in the formula

Difference in Spendable income=$429,000-$650,000

Difference in Spendable income=$221,000

Which means that the amount of $221,000 is the

Total gain amount from being a partnership.

Hence, the Individual investor gain will be calculated as $221,000*10%

Individual investor gain=$22,100

Therefore the amount of spendable income that each investor will have if the business is organized as a partnership rather than as a corporation will be $22,100

Answer 2

The additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation is $22,100.

• The calculation is as follows:

Income if formed as corporation in hands of each shareholder should be

= 1,000,000 ×  10% ×  ( 1- .34 ) × (1- .35)

= 100,000 × .66 × .65

= $42,900

Now  

Income will be taxable in hands of partner = 1,000,000 ×10% ×(1-.35)

= 100,000 ×.65

= 65000

Now  

Additional income should be

= $65,000 - $42,900

= $22,100

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