Taxation project 01 - Case Study Example

Therefore, assuming a marginal tax rate of 39.6%, amount available for reinvestment = annual cash flow – tax. Thus, 100,000 - (100,000*39.6%) = 100,000 – 39,600 = $ 60,400 (Schanz & Schanz, 2011). Q2: If Sandra operates the business as a regular C Corporation that makes no dividend distributions, calculate the annual after tax cash flow available for reinvestment in the business. A C corporation is a business organization formulated to restrain the owners’ liabilities. Therefore, C corporations, in the eyes of law, are different from their owners.

Using corporate tax rates, the business income is taxed at 34%. Therefore, if the corporation makes no dividend payments, the annual after tax cash flow available for reinvestments in the business = 13750 + {(100,000 – 75,000)*34%)} = (100,000 – 22,250) = $ 77,750 (Schanz & Schanz, 2011). Q3: there is no tax consequence in this case. Therefore, Sandra is still obligated to pay (100,000 *39.6%) = $ 39,600 as tax expense. As a result, the annual after tax cash flow remaining in the business = (100,000 – 39,600) = $ 60,400.

On the other hand, Sandra will have (100,000 – 20,000) = $ 80,000 from the withdrawal (Schanz & Schanz, 2011). Q4: Sandra’s corporation will be taxed twice if withdrawals are made to fund dividend payments to shareholders. The first tax will apply to taxable income and the second will be applied to dividend. However, the rate of tax and the taxable income will not be affected. The income tax = 13,750 + ((100,000 -75,000) * 34%) = 22,250. As a result, after tax cash flow remaining for investment in the business = {100,000 – 22,250} = $ 77,750.

The dividends will be subject to tax rate similar to that of long-term capital gain (15%). Therefore, the after tax cash flow from the dividend = (20,000*20%) = $ 4,000 (Schanz & Schanz, 2011). Q5: If Sandra wishes to operate the business