Problem: Martin would like to organize NXT (a business entity) as either an S corporation or as a corporation (taxed as a C corporation) generating a 15 percent annual before-tax return on a $800,000 investment. Martin's marginal tax rate is 32 percent and the corporate tax rate is 21 percent. Martin's marginal tax rate on individual capital gains and dividends is 15 percent. NXT will pay out its after-tax earnings every year to either its members or its shareholders.
If NXT is taxed as an S corporation, Martin's business income allocation would be subject to a 3.8 percent net investment income tax (he is a passive investor in the business) and the business income allocation would qualify for the deduction for qualified business income.
a. How much would Martin keep after taxes if NXT is organized as either an S corporation?
b. How much would Martin keep after taxes if NXT is organized as a C corporation?