Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a Partnership, under the following conditions.

See below problem 1-1 | Business & Finance homework help

The U.S. business earns $400,000 of taxable income in a given year.

Organizing the business as a corporation would create a tax disadvantage because corporations are subject to double taxation – meaning the corporation itself pays taxes on its profits, and then shareholders must pay personal income taxes on any dividends or profits they receive from their ownership stake in the company. This means that if the company earned $400,000 of taxable income, it would first be liable for corporate income taxes (which can vary depending on where the business is located) before anything is left over to distribute to shareholders as profit or dividends which would then be taxed again at individual rates (up to 37%).

In contrast, organizing a U.S. business as a partnership does not result in double taxation since all partners report their share of the firm’s profits or losses directly on their own personal tax returns in proportion to their ownership interest and are taxed only once at individual rates (up to 37%).