Kyrsten Haas expects her S corporation to generate a profit of $200,000. Kyrsten's marginal tax rate on ordinary income is 35%. What is Kyrsten's after-tax cash flow from the S corporation if no cash is distributed?

Question

Quizplus · Accepted Answer

Since Kyrsten's S corporation is a pass-through entity, the profit of $200,000 will flow through to her personal income tax return. She will therefore owe income tax on this profit at her marginal tax rate of 35%, which amounts to $70,000 ($200,000 x 35%). However, no cash is being distributed to Kyrsten, so her after-tax cash flow from the S corporation will be negative, equal to the tax liability of $70,000. Therefore, the correct answer is (B) $(70,000).

Kyrsten Haas Expects Her S Corporation to Generate a Profit