Assume the pre-tax profit of $50,000 has been earned by a business, and the owne

Question

Assume the 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 33%, while the rate for a person is 25%. The after-tax earnings available under the corporate and proprietorship forms of business are:

a.

for a corporation, $25,125; for a proprietorship, $37,500.

b.

for a corporation, $24,090; for a proprietorship, $36,500.

c.

for either a corporation or a proprietorship, $36,500.

d.

for either a corporation or a proprietorship, $24,090.

a.

for a corporation, $25,125; for a proprietorship, $37,500.

b.

for a corporation, $24,090; for a proprietorship, $36,500.

c.

for either a corporation or a proprietorship, $36,500.

d.

for either a corporation or a proprietorship, $24,090.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Corporation = 50000*(1- .33)*(1-.25) = $25125 (both the taxes will be applicable)

Proprietorship = 50000*(1-.25) = $37500 (only C Corporation tax would be applicable)

Option A (for a corporation, $25,125; for a proprietorship, $37,500) is the correct answer.

Thanks.

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