Question

Omar (single) is a 50 percent owner in Cougar LLC (taxed as a partnership). Omar works half time for Cougar and receives guaranteed payment of $50,000. Cougar LLC reported $450,000 of business income for the year (2022). Before considering his 50 percent business income allocation from Cougar and the self-employment tax deduction (if any), Omar's adjusted gross income is $210,000 (includes $50,000 guaranteed payment from Cougar and $160,000 salary from a different employer). Omar reports itemized deductions of $40,000. Answer the following questions for Omar.

Note: Leave no answer blank. Enter zero if applicable. Round your intermediate calculations and final answers to the nearest whole dollar.

b. What would be Omar's self-employment tax liability if he didn't receive any salary.



Sandra would like to organize LAB (a legal corporation) as either an S corporation or a C corporation for tax purposes. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $875,000 investment. Sandra's marginal income tax rate is 37 percent and her tax rate on qualified dividends and net capital gains is 20 percent. LAB's income is not qualified business income (QBI), so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its earnings after entity-level taxes every year. Ignore the additional Medicare tax and the net investment income tax when computing your answers.

Note: Round your intermediate computations to the nearest whole dollar amount.

a. How much cash after taxes would Sandra receive from her investment in the first year if LAB is organized as either an S corporation or a C corporation?


Sandra would like to organize LAB (a legal corporation) as either an S corporation or a C corporation for tax purposes. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $875,000 investment. Sandra's marginal income tax rate is 37 percent and her tax rate on qualified dividends and net capital gains is 20 percent. LAB's income is not qualified business income (QBI), so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its earnings after entity-level taxes every year. Ignore the additional Medicare tax and the net investment income tax when computing your answers.

Note: Round your intermediate computations to the nearest whole dollar amount.

b. What is the overall tax rate on LAB's income in the first year if LAB is organized as an S corporation or as a C corporation?

Note: Round your final answers to 2 decimal places.



Willow Corporation (a calendar-year C corporation) reported taxable income before the net operating loss deduction (NOL) in the amount of $100,000 in 2022. Willow had an NOL carryover of $90,000 to 2022. How much tax will Willow Corporation pay in 2022, what is its NOL carryover to 2023, and when will the NOL expire under the following assumptions?

Note: Leave no answer blank. Enter zero if applicable.

b. $40,000 of the NOL was generated in 2016 and $50,000 was generated in 2021.

Answer 1

b. If Omar didn't receive any salary, his self-employment tax liability would be calculated as follows:

Net earnings from self-employment = 50% x $450,000 = $225,000

Self-employment tax = 0.9235 x 0.153 x $225,000 = $32,651

Therefore, Omar's self-employment tax liability would be $32,651 if he didn't receive any salary.

a. If LAB is organized as an S corporation, Sandra's cash after taxes in the first year would be:

LAB's before-tax income = 8% x $875,000 = $70,000

LAB's entity-level tax (assuming a 21% corporate tax rate) = 0.21 x $70,000 = $14,700

LAB's after-tax income = $70,000 - $14,700 = $55,300

Sandra's share of after-tax income (assuming 100% ownership) = $55,300

Sandra's individual income tax on LAB's income (at 20%) = 0.2 x $55,300 = $11,060

Sandra's total cash after taxes = $55,300 - $11,060 = $44,240

If LAB is organized as a C corporation, Sandra's cash after taxes in the first year would be:

LAB's before-tax income = 8% x $875,000 = $70,000

LAB's entity-level tax (assuming a 21% corporate tax rate) = 0.21 x $70,000 = $14,700

LAB's after-tax income = $70,000 - $14,700 = $55,300

LAB's dividend to Sandra = $55,300

Sandra's individual income tax on the dividend (at 20%) = 0.2 x $55,300 = $11,060

Sandra's total cash after taxes = $55,300 - $11,060 = $44,240

Therefore, Sandra's cash after taxes would be the same in the first year regardless of whether LAB is organized as an S corporation or a C corporation.

b. The overall tax rate on LAB's income in the first year would be:

- For an S corporation: (entity-level tax / before-tax income) + (individual tax rate on share of after-tax income / (1 - entity-level tax rate))

- For a C corporation: (entity-level tax / before-tax income) + (individual tax rate on dividend / (1 - entity-level tax rate))

Using the numbers from part (a), we get:

- For an S corporation: ($14,700 / $70,000) + (0.2 / (1 - 0.21)) = 0.342 or 34.2%

- For a C corporation: ($14,700 / $70,000) + (0.2 / (1 - 0.21)) = 0.342 or 34.2%

Therefore, the overall tax rate on LAB's income in the first year would be 34.2% regardless of whether LAB is organized as an S corporation or a C corporation.

b. Willow Corporation's taxable income after the NOL deduction is $100,000 - $90,000 = $10,000.

Assuming a corporate tax rate of 21%, Willow Corporation's tax liability for 2022 would be:

Tax liability = 0.21 x $10,000 = $2,100

The NOL carryover to 2023 would be $90,000 - $10,000 = $80,000.

If $40,000 of the NOL was generated in 2016 and $50,000 was generated in 2021, the NOL carryover would expire as follows:

- $40,000 of the NOL would expire in 2036 (20-year carryforward from 2016)

- $50,000 of the NOL would expire in 2031 (10-year carryforward from 2021)

Therefore, Willow Corporation's tax liability for 2022 would be $2,100, its NOL carryover to 2023 would be $80,000, and the NOL carryover would expire in part as described above.