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Question - RUS Company, which has a 21% marginal tax rate, plans to make an investment that should generate $300,000 annual cash flow/ordinary income.
Instead of making the investment directly, RUS Company could form a new taxable entity (Little RUS) to make the investment. Little RUS's marginal tax rate on the investment income would be only 13%. However, Little RUS would have to incur a $26,500 annual nondeductible expense associated with the investment that RUS Company (without the new entity) would not incur.
Required -
(1) Determine the after tax cash flow if the company makes the investment directly.
(2) Determine the after tax cash flow if the investment is made through Little RUS.
(3) Determine what the better choice is: RUS or Little RUS.
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