| Course | AC507 Business Taxation and Strategies |
|---|---|
| Unit | Unit 7 |
| Paper type | After-tax cash flow analysis |
| Length | About 610 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC507 Unit 7
Five Years of Draws and a Sale: A Unit 7 After-Tax Cash Flow Analysis of an S Corporation Against a C Corporation
[Student Name]
Purdue University Global
AC507: Business Taxation and Strategies
Unit 7 After-Tax Cash Flow Analysis
[Instructor Name]
[Date]
The machining firm, its owner and every figure are composite; rates are simplified and held constant; the statutes and publication cited are real; this is coursework analysis, not tax advice.
Assumptions
The owner's marginal federal rate on ordinary income is 35 percent. Qualified dividends and long-term capital gains are taxed at 20 percent, plus the additional 3.8 percent levy on investment income where it applies. Cash flows are discounted at 8 percent. In year five she sells her stock for $3,000,000; her stock basis is $100,000. Salary, payroll tax and state taxes are the same under both forms and are left out. She works full time in the business.
The S Corporation, Years 1 to 5
The $400,000 of profit passes through to her return. Her qualified business income deduction is the lesser of 20 percent of that income, $80,000, or 50 percent of the W-2 wages the business pays, $75,000, so it is held to $75,000 by the wage limit (Qualified business income, 26 U.S.C. § 199A, 2018). Her taxable share is $325,000, and tax at 35 percent is $113,750. Because she materially participates, the net investment income tax does not apply. Her cash after tax is $286,250 a year.
The C Corporation, Years 1 to 5
The corporation pays 21 percent on $400,000, or $84,000, and distributes the remaining $316,000 as a dividend (Tax imposed, 26 U.S.C. § 11, 2018). Dividends are investment income, so she pays 23.8 percent, $75,208. Her cash after tax is $240,792 a year.
The Exit in Year 5
Under both forms, she sells stock for $3,000,000 with a basis of $100,000, a gain of $2,900,000. For the S corporation, because she distributed all its income each year, her basis stays at $100,000; the gain is taxed at 20 percent, and the net investment income tax does not apply to the extent the gain reflects an active business she materially participates in. Tax is $580,000, leaving $2,420,000. For the C corporation, the gain on stock is investment income, taxed at 23.8 percent, $690,200, leaving $2,309,800. The comparison assumes her shares fall outside the small business stock rules, which Unit 10 shows can change the answer.
Present Value
The five-year annuity factor at 8 percent is 3.9927 and the year-five discount factor 0.6806. The S corporation's annual cash has a present value of $1,142,912 and its exit $1,647,052, a total of $2,789,925. The C corporation's annual cash is worth $961,410 and its exit $1,572,014, a total of $2,533,424. The S corporation leads by $256,501.
The S corporation wins because every dollar she draws is taxed once, at 35 percent, while every C corporation dollar is taxed twice, at 21 and then 23.8 percent, an effective 39.8 percent, and her plan to draw out everything gives the C corporation no chance to defer the second tax.
When the Answer Would Change
The C corporation would look better if she planned to leave profits in the company to grow, because profits kept in the company bear only the 21 percent corporate rate until paid out. It would also win if her stock qualified for the small business stock exclusion, which could remove most or all of the exit gain from tax. Finally, if the buyer insisted on buying assets rather than stock, a C corporation would face corporate tax on the asset sale before any distribution, widening the S corporation's lead (Internal Revenue Service, 2025).
References
Internal Revenue Service. (2025). Instructions for Form 1120-S: U.S. income tax return for an S corporation. U.S. Department of the Treasury.
Qualified business income, 26 U.S.C. § 199A (2018).
Tax imposed, 26 U.S.C. § 11 (2018).
AC507 Unit 7 instructions, in plain terms
Unit 7 of AC507 asks you to compare the after-tax cash an owner keeps under two forms over a planning period. Box the assumptions first: rates, discount rate, holding period, exit price and basis, and what is held constant. Compute annual after-tax cash under each form, including the pass-through deduction and its wage limit for the S corporation, and corporate tax plus dividend tax and the investment income surtax for the C corporation. Compute the exit under each form. Discount everything to present value and state the difference. Explain where the difference comes from in one sentence. Identify the conditions that would reverse the answer, such as retaining earnings, small business stock treatment or an asset sale. Reference the corporate rate statute, the pass-through deduction and IRS guidance in APA 7.
How the AC 507 Unit 7 example is put together
The sample's assumptions fix a 35 percent ordinary rate, 20 percent plus 3.8 percent on investment income, an 8 percent discount rate and a $3,000,000 year-five sale against $100,000 of basis. The S section limits the pass-through deduction to $75,000 by wages, giving $113,750 of tax and $286,250 of cash. The C section pays $84,000 of corporate tax and $75,208 of dividend tax, leaving $240,792. The exit section nets $2,420,000 under S and $2,309,800 under C. Present values of $2,789,925 and $2,533,424 follow. The highlighted sentence explains single versus double tax. A closing section names retained earnings, small business stock and an asset sale as reversal conditions.
Reading the AC507 Unit 7 grading rubric
Cash flow comparisons in AC507 earn points for complete, consistent assumptions and correct computation under each form. Graders check the wage limit on the pass-through deduction, the corporate rate, dividend taxation including the surtax, and the exit under each form. The rubric rewards present value analysis with stated factors and a one-sentence explanation of the source of the difference. Identifying the conditions that would reverse the answer shows judgment beyond the arithmetic. Comparisons that ignore the exit, apply the surtax inconsistently or omit the wage limit lose credit. A clear table of years, exit and present value aids grading, and the statutes and IRS instructions should be referenced in APA 7.
Common AC507 Unit 7 mistakes, and how to avoid them
Common Unit 7 problems include comparing only one year rather than the whole plan, so the exit is ignored. The pass-through deduction is taken at a flat 20 percent without the wage limit. Dividend tax omits the investment income surtax, or applies it to an active owner's S corporation income. Present value is skipped, or cash flows are added without discounting. The conclusion is stated as a general rule rather than tied to this owner's plan to distribute everything. If your section's owner plans to retain earnings or sell assets, a writer can rebuild the comparison with your assumptions.
Get an AC507 Unit 7 example written to your instructions
For Unit 7, the client's income, salary, distribution plan and exit assumptions come first, then the discount rate and rubric if the section fixes them. Both structures are priced on one set of constants, the exit is computed separately and discounted, and the analysis comes back in 24-48h. The first custom sample is free. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC507 Unit 7 questions, answered
Why leave the salary out of the table?
Because it is taxed the same way under both structures: deductible to the corporation, wages to the owner, payroll tax on both. Including it would add identical rows to each column without changing the difference. The example states the salary in its assumptions box, since the Section 199A wage limit depends on it, and then excludes it from the cash rows so the comparison shows only what the structure changes.
Does the discount rate change the answer?
It changes the size of the gap, not its direction, on these facts, because the S corporation leads in every year and at exit. A prompt where the C corporation led early and the S corporation led late, or the reverse, would make the rate decisive, and the analysis would then report the rate at which the two structures break even. The example notes this in its sensitivity paragraph.
Where can I find a free AC507 Unit 7 sample paper?
This page holds a full AC507 Unit 7 after-tax cash flow analysis weighing S and C status for a composite machining firm over five years and a sale, with present values and APA 7 references.
When would the C corporation come out ahead?
If the owner kept profits in the company instead of drawing them, if her stock qualified for the small business stock exclusion, or, less directly, if rates changed. Her plan to distribute everything removes the C corporation's deferral advantage.
Why is the pass-through deduction limited to $75,000?
Above certain income levels the deduction cannot exceed half the W-2 wages the business pays. The firm pays her $150,000 in wages, so the limit is $75,000, slightly below 20 percent of $400,000.