new business is just being formed by 10 investors, each of whom will own 10% of the business. the firm is…

new business is just being formed by 10 investors, each of whom will own 10% of the business. the firm is expected to earn $1,000,000 before taxes each year. the corporate tax rate is 34% and the personal tax rate for the firms investors is 35%. the firm does not need to retain any earnings, so all of its after - tax income will be paid out as dividends to its investors. the investors will have to pay personal taxes on whatever they receive. how much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?\n$22,100\n$22,763\n$26,078\n$20,332\n$19,006

new business is just being formed by 10 investors, each of whom will own 10% of the business. the firm is expected to earn $1,000,000 before taxes each year. the corporate tax rate is 34% and the personal tax rate for the firms investors is 35%. the firm does not need to retain any earnings, so all of its after - tax income will be paid out as dividends to its investors. the investors will have to pay personal taxes on whatever they receive. how much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?\n$22,100\n$22,763\n$26,078\n$20,332\n$19,006

Answer

Explanation:

Step1: Calculate after - tax income as a corporation

The firm's pre - tax income is $1,000,000$. The corporate tax rate is 34%. So the corporate tax paid is $1000000\times0.34 = 340000$. The after - tax income of the corporation is $1000000\times(1 - 0.34)=660000$. Each investor's share of after - tax income is $\frac{660000}{10}=66000$. Then the investor pays personal tax on this amount. The personal tax paid by each investor is $66000\times0.35 = 23100$. The spendable income of each investor as a corporation is $66000\times(1 - 0.35)=42900$.

Step2: Calculate income as a partnership

In a partnership, there is no corporate - level tax. Each investor's pre - personal - tax income is $\frac{1000000}{10}=100000$. The personal tax paid by each investor is $100000\times0.35 = 35000$. The spendable income of each investor as a partnership is $100000\times(1 - 0.35)=65000$.

Step3: Calculate the difference

The additional spendable income for each investor if the business is a partnership rather than a corporation is $65000−42900 = 22100$.

Answer:

$22,100$