Your client, Kerri, is considering forming a new business, KMP. Kerri has asked for your advice about whether she should form KMP as a sole proprietorship (a flow-through entity) or as a C Corporation. She would like you to create an Excel spreadsheet that estimates the overall tax rate* on KMP’s taxable income based on several assumptions. These assumptions are as follows:
Kerri’s marginal tax rate is 37%.The corporate tax rate is 21%KMP will generate $500,000 of taxable business income.KMP will make a cash distribution of all of its after-tax earnings to Kerri at the end of the year.Kerri will be eligible to claim the full 20% QBI deduction, if applicable (that is, ignore any phase-out rules for purposes of your calculations).*The overall tax rate on KMP’s business income is the total tax paid at the entity and owner level (if applicable) divided by KMP’s expected taxable income of $500,000.
REQUIRED.
1. Create a spreadsheet, based on the above assumptions, that calculates the overall tax rate on $500,000 of taxable income assuming KMP is set up as a sole proprietorship and assuming, alternatively, that KMP is set up as a C Corporation.
2. Perform an additional analysis that addresses the following question: How will your analysis in part 1 change if the tax law changes such that the QBI deduction is eliminated?
Your spreadsheet does not need to follow a specified format. It just needs to be clear so that your client can understand your analyses. Please clearly label your work rather than just showing a number with little explanation. Your grade will be based not only on the accuracy of your calculations, but also the ease with which a client could understand your analysis.
Kerri’s marginal tax rate is 37%.The corporate tax rate is 21%KMP will generate $500,000 of taxable business income.KMP will make a cash distribution of all of its after-tax earnings to Kerri at the end of the year.Kerri will be eligible to claim the full 20% QBI deduction, if applicable (that is, ignore any phase-out rules for purposes of your calculations).*The overall tax rate on KMP’s business income is the total tax paid at the entity and owner level (if applicable) divided by KMP’s expected taxable income of $500,000.
REQUIRED.
1. Create a spreadsheet, based on the above assumptions, that calculates the overall tax rate on $500,000 of taxable income assuming KMP is set up as a sole proprietorship and assuming, alternatively, that KMP is set up as a C Corporation.
2. Perform an additional analysis that addresses the following question: How will your analysis in part 1 change if the tax law changes such that the QBI deduction is eliminated?
Your spreadsheet does not need to follow a specified format. It just needs to be clear so that your client can understand your analyses. Please clearly label your work rather than just showing a number with little explanation. Your grade will be based not only on the accuracy of your calculations, but also the ease with which a client could understand your analysis.
