Asked by Kerolos Joseph on Jul 16, 2024
Verified
Assume that pre-tax profit of $50,000 has been earned by a business, and the owner/proprietor wants to withdraw all of the after-tax profit for personal use. Assume the tax rate for a C corporation is 34%, while the rate for a person is 27%. The after-tax earnings available under the corporate and proprietorship forms are:
A) for a corporation, $33,000; for a proprietorship, $36,500.
B) for a corporation, $23,760; for a proprietorship, $36,500.
C) for either a corporation or a proprietorship, $36,500.
D) for either a corporation or a proprietorship, $23,760.
Pre-tax Profit
Earnings of a business before any tax is applied; also known as gross profit or operating profit.
C Corporation
A legal structure for a corporation in which the owners are taxed separately from the entity, subject to corporate income tax.
Tax Rate
A percentage at which an individual or corporation is taxed.
- Acquire an understanding of the key ideas and advantages of forming a company, including the protection against personal liability and implications for taxes.
Verified Answer
RA
Riley AkinsJul 21, 2024
Final Answer :
B
Explanation :
For the C corporation, the tax on the pre-tax profit of $50,000 would be $17,000 (34% of $50,000), leaving after-tax earnings of $33,000.
For the proprietorship, the income is taxed at the personal income tax rate of 27%, so the after-tax earnings would be $36,500 (73% of $50,000).
Therefore, the proprietorship form would result in more after-tax earnings for the owner/proprietor.
For the proprietorship, the income is taxed at the personal income tax rate of 27%, so the after-tax earnings would be $36,500 (73% of $50,000).
Therefore, the proprietorship form would result in more after-tax earnings for the owner/proprietor.
Learning Objectives
- Acquire an understanding of the key ideas and advantages of forming a company, including the protection against personal liability and implications for taxes.