Question

Banana, an individual, expects her S corporation to generate ordinary profit of $1,700,000. Banana's marginal tax rate on ordinary income is 37%. What is Banana's after-tax cash outflow from the S corporation if no cash is distributed?

O $1,071,000
O $314,500
O $850,000
O $629,000

Answer 1

Banana's after-tax cash outflow from the S corporation, considering her 37% marginal tax rate and no cash distributions, would be $1,071,000 ($1,700,000 - $629,000 in taxes).

Step-by-step explanation:

Banana's after-tax cash outflow from the S corporation, assuming no cash distributions and using her marginal tax rate, is calculated as follows:

If no cash is distributed from Banana's S corporation, her after-tax cash outflow can be calculated by multiplying her expected ordinary profit by her marginal tax rate. In this case, Banana's expected ordinary profit is $1,700,000 and her marginal tax rate is 37%.

Therefore, her after-tax cash outflow from the S corporation can be calculated as follows:

$1,700,000 x 37% = $629,000

So, Banana's after-tax cash outflow from the S corporation, if no cash is distributed, would be $629,000.

Therefore, the after-tax cash outflow is $1,071,000. This is the amount Banana retains from the S corporation's profit after paying taxes, despite her not receiving an actual cash distribution.