2 parts to the question... a. Calculate the tax disadvantage to organizing a U.S

Question

2 parts to the question...

a.  Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conidtions:  Assume that all earnings will be paid out as cash dividends.  Operating income will be $500,000 per year under either organizational form.  The tax rate on corporate profits is 35%, the average personal tax rate for the partners is also 35%, and the capital gains tax rate on dividen income is 15%.

b.  Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003 (35% on corporate profits and 38.6% on personal investment income)

Explanation / Answer

a)If under these conditions as a partnership, operating income will be taxed only once, so investors will receive $500,000 x (1-0.35) = $325,000. But as a corporation, operating income will be taxed once at the corporate level and again at the personal level at the capital gains tax rate of 15% percent, so investors will receive only $500,000 x (1-0.35)(1-0.15) = $276,250. The

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