Question

Julio sold his corporation to a competitor, Exeter LLC, for $100,000,000. Julio incorporated his business 17 years ago by investing $500,000 plus his proprietary know-how. There have been no other corporate shareholders. Compute Julio's after-tax cash flow from the sale, assuming he is in the 35% tax bracket (20% long-term capital gain rate) and has no other property sales during the year. Assume the 3.8 percent Net Investment Income Tax applies.

Answer 1

Julio's after-tax cash flow from selling his corporation for $100,000,000, after accounting for a 20% long-term capital gains tax and the 3.8% Net Investment Income Tax, is $76,319,000.

Step-by-step explanation:

To compute Julio's after-tax cash flow from the sale of his corporation, we need to consider the capital gains tax. Julio's original investment in the corporation was $500,000, which means the capital gain on the sale is $99,500,000 ($100,000,000 sale price minus the $500,000 original investment).

At a long-term capital gains tax rate of 20%, the tax due on the capital gain would be $19,900,000 ($99,500,000 * 20%). In addition, the 3.8% Net Investment Income Tax applies, amounting to an additional $3,781,000 ($99,500,000 * 3.8%). The total tax Julio would pay is therefore the sum of these two amounts, which is $23,681,000 ($19,900,000 + $3,781,000).

Thus, Julio's after-tax cash flow from the sale would be the sale price minus the tax paid, which equals $76,319,000 ($100,000,000 - $23,681,000).