A taxpayer capitalizes a wholly owned corporation with $100,000. The corporation invests in a project that earns an annual pretax rate of return of 15% and faces a 15% corporate tax rate. The taxpayer faces a personal tax rate of 39.6% and expects to liquidate the corporation after 20 years. a. What is the after-tax rate of return on this investment? b. Do you recommend that the taxpayer make this investment via an S corporation to avoid double taxation? Assume the corporation distributes enough cash to the taxpayer each year to allow him to pay his taxes on the S corporation income.
A. Note here assuming that the capital gains tax rate equals the personal tax rate on ordinary income of 39.6%. The after tax accumulation in the corporation is given by.
Calculations 1[1+R(1-tc)]n(1-tcg)+tcg $1
R=.15 tc=.15 tcg-.396
to calculate the after tax rate of return
the result from the first calculation divided by $100,000 to the power of 1/year
B. Calculate the after tax return to the S-corp and compare to your return in part a