Marla recently inherited $50,000 and is considering two alternatives for investing these funds. Investment A is stock of a C corporation, expected to pay annual dividends of 8 percent. Investment B is stock of an S corporation. Based on income projections, Marla’s share of the S corporation’s ordinary income would be approximately $10,000 per year. However, the S corporation does not expect to make cash distributions for the foreseeable future. Marla would hold either investment for three years, at which time she believes the C corporation stock could be sold for $60,000 and the S corporation stock could be sold for $90,000.
Assume that the initial investment would be made in year 0, dividends on the C corporation stock would be received in years 1, 2, and 3; S corporation earnings would be allocated in years 1, 2, and 3; and either investment would be sold in year 3. Assume that Marla’s S corporation income would not qualify for the QBI deduction. Also assume that Marla’s marginal tax rate on ordinary income is 35 percent. Using a 4 percent discount rate, calculate the
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Principles Of Taxation For Business And Investment Planning 2020 Edition
- In 2023, Kathleen Tweardy incurs $30,000 of interest expense related to her investments. Her investment income includes $7,500 of interest, $6,000 of qualified dividends, and a $12,000 net capital gain on the sale of securities. Kathleen asks you to compute the amount of her deduction for investment interest, taking into consideration any options she might have. a. If Kathleen elects not to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be s b. If Kathleen elects to treat the capital gain and qualified dividends as investment income for purposes of the investment interest expense limitation, her deduction will be s c. In addition, Kathleen wants your suggestions as to any tax planning alternatives that are available. Complete the letter to her that contains your advice.arrow_forwardElla and Aaron Martin together earn approximately $92,000 a year after taxes. Through an inheritance and some wise investing, they also have an investment portfolio with a value of almost $200,000. a. How much of their annual income do you recommend the Martins hold in some form of liquid savings as reserves? Explain. b. How much of their investment portfolio do you recommend they hold in savins and other short-term investment vehicles? Explain. c. How much, in total, should they hold in short-term liquid assets?arrow_forwardHayley recently invested $31,000 in a public utility stock paying a 6 percent annual dividend. (Hayley’s marginal income tax rate is 32 percent.) Use Tax Rate Schedule, Dividends and Capital Gains Tax Rates for reference. Required: If Hayley reinvests the annual dividend she receives net of any taxes owed on the dividend, how much will her investment be worth in five years if the dividends paid are qualified dividends? What will her investment be worth in five years if the dividends are nonqualified?arrow_forward
- The Smith Family Trust earns $60,000 in eligible dividends during 2020. It allocates $20,000 of income to its beneficiary, Sam Smith Jr. What is the type of income that Sam Smith Jr. will report on his tax returns? Answer options: An eligible dividend Trust income A return of capital Capital gainsarrow_forwardMarlo and Merlins son, Alex, needs 20,000 to start a business. They have 30,000 in securities that they can use to give him the capital he needs. Pertinent information regarding the securities is given below: Marlo and Merlin are in the 28 percent marginal tax rate bracket; Alex is in the 15 percent marginal tax rate bracket. Neither Marlo, Merlin, nor Alex has any other capital asset transactions during the year. Alexs basis in any of the securities gifted to him will be the lesser of his parents basis or the fair market value of the security. Discuss the tax effects of alternate methods of transferring 20,000 to Alex, and devise an optimal plan for making the transfer.arrow_forwardAn investment broker that Ava trusts recommended that she purchase a $50,000, 15-year municipal bond that generates a dividend of 4% per year payable quarterly. She will pay a discounted amount of $45,000 now for the bond. In general, Ava hopes to make 8% per year compounded quarterly on her investments. Using the PW value, determine if this is a financially advantageous investment for her. Solve with factors. The present worth is $ . This a financially sound investment. Need accurate answer and give answer fastarrow_forward
- Komiko Tanaka invests $18,000 in LymaBean, Inc. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term. How much cash will Komiko retain, after-taxes, if she holds the investment for 5 years and then sells when the long-term capital gains rate is 25 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) What is Komiko’s after-tax rate of return on her investment in part (c)? (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) e. How much cash will Komiko retain, after taxes, if she holds the investment for 15 years and then she sells when the long-term capital gains rate is 15 percent? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.) f. What is Komiko’s after-tax rate of return on her…arrow_forwardKomiko Tanaka invests $14,500 in LymaBean, Incorporated. LymaBean does not pay any dividends. Komiko projects that her investment will generate a 10 percent before-tax rate of return. She plans to invest for the long term. How much cash will Komiko retain, after taxes, if she holds the investment for 15 years and then she sells when the long-term capital gains rate is 15 percent?arrow_forwardStephanie inherited $40,000. She wants to put some of the money in a certificate of deposit that pays 2.1% interest per year and the rest in a mutual fund account that pays 6.5% per year. How much should she invest in each account if she wants to earn 5.4% interest per year on the total amount?arrow_forward
- Amanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Amanda's marginal income tax rate is 37 percent, and her tax rate on qualified dividends and net capital gains is 20%. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume the income is not eligible for the QBI deduction. Further, when computing your answers, include the self-employment tax (use a 2.9% marginal rate for self-employment income because Amanda has salary over $147,000 from her employer) but not the additional Medicare tax or the net investment income tax. b. What is the overall tax rate on BAL's income in the first year if BAL is organized as an LLC or as a C corporation? Note: Round intermediate calculations to the nearest whole dollar. Round your final answers to 2 decimal…arrow_forwardKathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $25,000 for 1,200 shares of Malti Company’s common stock. She received a $1,032 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $24,000. Kathy would like to earn a return of at least 13% on all of her investments. She is not sure whether the Malti Company stock provided a 13% return and would like some help with the necessary computations. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value that Kathy earned on her investment in Malti Company stock. 2. Did the Malti Company stock provide a 13% return?arrow_forwardAmanda would like to organize BAL as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 8 percent annual before-tax return on a $500,000 investment. Amanda's marginal income tax rate is 37 percent, and her tax rate on qualified dividends and net capital gains is 20%. Assume that BAL will distribute half of its after-tax earnings every year as a dividend if it is formed as a C corporation. Assume the income is not eligible for the QBI deduction. Further, when computing your answers, include the self-employment tax (use a 2.9% marginal rate for self-employment income because Amanda has salary over $147,000 from her employer) but not the additional Medicare tax or the net investment income tax. a. How much cash after taxes would Amanda receive from her investment in the first year if BAL is organized as an LLC? What if BAL is organized as a C corporation? Note: Round Intermediate calculations and your final answers to…arrow_forward
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning