Five annual draws and an asset sale, discounted at [8] percent, leave the S corporation $572,331 ahead for one machining owner, the finding of AC507's Unit 7 cash flow analysis. Searches like "ac 507 unit 7 assignment example", "ac507 unit 7 sample" and "ac507 unit 7 example" land here.
What a finished AC507 Unit 7 after tax cash flow analysis looks like
A five-year table, an exit column and a present value row, with assumptions boxed above. The box fixes the owner's marginal rate at [35] percent, qualified dividends at [20] percent plus the 3.8 percent net investment income tax, a discount rate of [8] percent and a year-five sale price of [$3,000,000] against an inside basis of [$100,000]. The S rows show a Section 199A deduction held to $75,000 by the wage limit, owner tax of $113,750 and cash of $286,250 a year. The C rows show $84,000 of corporate tax, a $316,000 dividend taxed at 23.8 percent and $240,792 reaching the owner. The exit column assumes the buyer purchases assets: $2,420,000 to the owner through the S corporation, $1,845,742 through the C corporation after two layers of tax.
How a AC507 Unit 7 example is structured
Assumptions are stated once and never varied between columns, because a cash flow comparison is only as fair as its constants. The salary is identical in both structures and is left out of the table, a choice explained in one sentence. Annual rows come first and show the recurring gap, $45,458 a year, discounted with a five-year annuity factor of 3.99271 to $181,501. The exit is computed separately, since it carries most of the difference: the C corporation pays $609,000 on the asset gain, then distributes $2,391,000 that the owner reports as liquidation gain, while the S corporation's gain passes through once and raises her stock basis. Discounted, that gap is worth $390,830. A sensitivity paragraph reruns the exit as a stock sale, where the spread narrows to $110,200. A closing sentence explains why Section 1202 is unavailable on these facts.
Constants in a box
Rates, discount factor, salary, sale price and inside basis are listed once above the table and applied without change to both structures.
The yearly gap
Pass-through income taxed once at the bracketed marginal rate beats entity tax plus a dividend layer by $45,458 in each of the five years.
A deduction held down by wages
Twenty percent of [$400,000] would be $80,000, but half of the [$150,000] in W-2 wages caps the Section 199A deduction at $75,000.
An exit that dominates
Selling assets through the C corporation costs two layers of tax, and the discounted exit gap of $390,830 is more than twice the annual stream's.
The stock sale sensitivity
If the buyer takes shares instead, the corporate layer drops out of both columns, and the remaining $110,200 difference is the net investment income tax alone.
Where marks go in AC507 Unit 7
The first thing checked is a common denominator: one owner, one set of years, one discount rate. Tables that compare an S corporation's annual cash with a C corporation's retained earnings measure two different plans and prove nothing. Ignoring the exit is a frequent weakness, since five years of annual gap amount to less than half of what the sale decides. Some papers apply the Section 199A deduction at a flat 20 percent without testing the wage limit an owner at this income faces. Others charge the net investment income tax on the S owner's operating income, which Section 1411 excludes for an owner who materially participates. Undiscounted totals presented as the answer cost precision. A conclusion favoring the C corporation for its 21 percent rate, on facts where every dollar leaves annually, contradicts the client's own plan.
Get a 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.
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.
Why is Section 1202 unavailable here?
The owner bought her shares from the founder rather than receiving them at original issuance, and Section 1202 applies only to stock acquired at original issue for money, property or services. One sentence in the analysis records that. If your prompt supplied original-issue stock, the C corporation's stock sale column would gain an exclusion row, sized under whatever version of Section 1202 governed when the shares were issued.
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.