Chapter 15 Homework

Solution
Problem 53
a.
(1) Pretax earnings
(2) Entity level tax
(3) After-tax entity
earnings
(4) Owner tax
(5) After-tax earnings
b.
Overall tax rate

S Corp.
Description
$18,000 9% $200,000
-0$18,000 (1) (2)
6,300 (3) 35%
$11,700 (3) (4)
S Corp
35% (4)/(1)

C Corp.
Description
$18,000 9% $200,000
6,300 35% (1)
$11,700 (1) (2)
2,340 (3) 20%
$9,360 (3) (4)
Corp.
48% [(2) + (4)]/(1)

Problem 54
a.
(1) Pretax earnings
(2) Entity level tax
(3) After-tax entity
earnings
(4) Owner tax
(5) After-tax earnings
b.
Overall tax rate

LLC
Description
$11,000 11% $100,000
-0$11,000 (1) (2)
3,850 (3) 35%
$7,150 (3) (4)
LLC
35% (4)/(1)

C Corp.
Description
$11,000 11% $100,000
1,650 15% (1)
$9,350 (1) (2)
1,870 (3) 20%
$7,480 (3) (4)
Corp.
32% [(2) + (4)]/(1)

Notes: By comparing Problem 54 to Problem 53, we see that when C Corp has lower tax rate
than individual dividend tax rate, C Corp is tax favored (double taxation lowers tax than passthrough). When C Corp has higher tax rate than individual tax rate, pass-through (LLC) is tax
favored.

Problem 56
a) $0. A corporation is not allowed to deduct dividend distributions it makes to its
shareholders.

b) $750. First, Guy owns 5% of Marathon and his share of income is 1,000,000*5%=5,000.
Second, the income he receives is dividend, subject to dividend tax (15%). Dividend
tax=5000*15%=750
c) $1,530 tax. 15,000 dividend 10,500 dividends received deduction = $4,500 taxable
portion of dividend 34% marginal tax rate = $1,530.