question is attached
Plum Corporation will begin operations on January 1. Earnings for the next five years are projected to be relatively stable at about $80,000 per year. The shareholders of Plum are in the 33% tax bracket and dividends are taxable at 15%.
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a. Assume that Plum will reinvest its after-tax earnings in the growth of the company.
If Plum operates as a C corporation, the corporation’s income tax will be $
, and the shareholders’ liability will be
$
.
If Plum operates as an S corporation, the corporation’s income tax will be $
and the shareholders’ liability will be
$
.
Therefore, viewed from an entity-owner perspective, operating as
will result in overall tax savings.
b. Assume that Plum will distribute its after-tax earnings each year to its shareholders.
If Plum operates as a C corporation, the corporation’s income tax will be $
, and the shareholders’ liability will be
$
.
If Plum operates as an S corporation, the corporation’s income tax will be $
and the shareholders’ liability will be
$
.
Therefore, viewed from an entity-owner perspective, operating as
will result in overall tax savings.