Sarah plans to invest $1 million in a business venture that will...
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Sarah plans to invest $1 million in a business venture that will last five years. She is debat- ing whether to operate the business as a C corporation or a sole proprietorship. If a C cor- poration, she will liquidate the corporation at the end of the five-year period. She expects the business to generate taxable income as follows: Year Taxable Income 1 $ 40,000 2 70,000 3 90,000 4 150,000 5 350,000 If incurred in corporate form, these taxable income amounts will be subject to the corporate tax rate schedule. If in proprietorship form, they will be subject to Sarah's 37% marginal tax rate because she has income from other sources that puts her in the top individual tax bracket. Assume that taxable income from the proprietorship qualifies for the 20% qualified business income deduction such that net taxable amounts are 80% of reported taxable (qualified business) income. Any capital gain upon corporate liquidation will be taxed at 23.8% (the 20% maximum capital gain rate plus the 3.8% rate on net investment income). Assume that Sec. 1202 does not apply. Required: Determine the after-tax amount Sarah will have at the end of five years under each alternative. Which alternative do you recommend
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