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Suppose you are advising a college basketball coach on whether to organize

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Question

Suppose you are advising a college basketball coach on whether to organize his summer basketball camps for high school students as a C corporation versus an S corporation. The taxpayer plans to operate the camps for 5 years, then wind up the corporation by simply paying any retained earnings as a dividend in the final year. The taxpayer faces a marginal tax rate of 35% and the corporate tax rate is a flat rate of 35%. The expected pretax rate of return on the camps is 12% per year (before any compensation or dividends to the taxpayer).;a. Assuming zero dividends are paid each year, which corporate form would you advise the taxpayer to select?;b. Assuming 50% of taxable income is distributed each year as dividends, which form would you advise the taxpayer to select? Explain your answer in words (no algebra is required here).;c. Again assuming a zero dividend payout each year, what shareholder-level tax rate, ts, in the C corporation form would equate the after-tax return to the taxpayer in both corporate forms?;d. Explain, in words, how it might be possible to lower the shareholder-level tax to the required rate in part (c) such that the after-tax rate of return to the taxpayer is the same in both corporate forms.

 

Paper#24738 | Written in 18-Jul-2015

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