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Obviously not legal or financial advice. Have fun.
Questions and Comments
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MAKE A COPY TO EDIT
Questions, comments, or criticism (criticism being the most valuable):
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Jgerstel@landklegal.com
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https://landklegal.com/joseph-gerstel
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InputsEarnings Calculations
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Purchase Price$4,000,000 Year12345678910
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Initial Earnings$1,000,000 Pass Through
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Organic Growth Rate3%Earnings$1,000,000 $1,030,000 $1,060,900 $1,092,727 $1,125,509 $1,159,274 $1,194,052 $1,229,874 $1,266,770 $1,304,773
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Return on Invested Capital20%Depreciation$266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667
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%Earnings Reinvested0%Taxes$295,167 $307,242 $319,679 $332,489 $345,684 $359,274 $373,273 $387,691 $402,542 $417,838
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Purchase EBITDA Multiple4Reinvested Capital$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
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Exit EBITDA Multiple6Post-Tax Distributed Capital$704,833 $722,758 $741,221 $760,238 $779,825 $800,000 $820,780 $842,183 $864,228 $886,935
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Exit Year5Basis$3,733,333 $3,466,667 $3,200,000 $2,933,333 $2,666,667 $2,400,000 $2,133,333 $1,866,667 $1,600,000 $1,333,333
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199A Pass Thru Deduction Eligible*Yes
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Depreciation Period (years)15Corporation
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Earnings$1,000,000 $1,030,000 $1,060,900 $1,092,727 $1,125,509 $1,159,274 $1,194,052 $1,229,874 $1,266,770 $1,304,773
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Assumed Rates**Depreciation$266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667 $266,667
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Pass Through Rates (i.e., S corps/partnerships)
Taxes$191,657 $199,497 $207,573 $215,891 $224,458 $233,283 $242,372 $251,734 $261,377 $271,309
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Fed Tax Rate37%Reinvested Capital$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
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199A Adjustment (20%)7.40%Post-Tax Distributed Capital$560,586 $575,954 $591,782 $608,086 $624,878 $642,175 $659,990 $678,340 $697,240 $716,707
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State Tax Rate (use your state)6.85%Basis$3,733,333 $3,466,667 $3,200,000 $2,933,333 $2,666,667 $2,400,000 $2,133,333 $1,866,667 $1,600,000 $1,333,333
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NIIT***3.80%
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Total Personal Rate40.25%Year 5 Steady State Distribution Scenario(i.e., hold and take cash flow)
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Actual Initial Rate (after depreciation)
29.52%Pass ThroughC Corp
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Distribution$779,825 $901,050
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C Corp RatesAdditional Tax for Owner$0 $276,172
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Corp Fed Rate21%Total$779,825 $624,878
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Corp State Rate (use your state)6.50%
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Blended Corp Rate****26.14%Year 5 Exit Scenario
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Actual Initial Rate (after depreciation)
19.17%Pass ThroughCorp - Asset SaleCorp - QSBS Asset Sale**Corp - Stock Sale***Corp - QSBS Stock Sale
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Sale Price$6,753,053 $6,753,053 $6,753,053 $6,753,053 $6,753,053
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Shareholder Level Rates*****Basis$2,666,667 $2,666,667 $2,666,667 $2,666,667 $2,666,667
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Cap gains/dividends20%Corp Level Tax$0 $1,067,977 $1,067,977 $0 $0
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State tax rate (use your state)6.85%Distribution/Payout$6,753,053 $5,685,076 $5,685,076 $6,753,053 $6,753,053
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NIIT3.80%Depreciation Recapture*$1,333,333 $0 $0 $0 $0
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Total SH Rate30.65%Personal Tax$1,380,477 $516,476 $0 $843,811 $0
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Total (after tax)$5,372,575 $5,168,600 $5,685,076 $5,909,242 $6,753,053
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Blended Corporate + SH Rate48.77%Total w/ All Distributions$9,081,451 $8,129,887 $8,646,362 $8,870,529 $10,461,928
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Actual Initial Rate (after depreciation)
43.94%
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*Taxed at ordinary income rates for sale of a partnership (or its assets), but not applicable on an S corp stock sale which is all at the cap gains rate. For C corp sale, there's no separate rate for recapture, just one corp tax rate.
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Footnotes
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*20% deduction for eligible pass thrus
**Asset sale by a QSBS eligible corp will have corporate tax on gain in assets, but should be eligible for QSBS exemption on gain in stock if it liquidates and distributes proceeds.
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**State tax rates vary, default rates are estimated NY rates
***This is theoretical as a stock sale is not ideal for a buyer and so should not get the same multiple all else equal
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***Assumes passive investor. Operator is subject to self-employment tax instead, though for S-corps, you may be able to limit this.
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****Adjusted to reflect that state tax is a fed tax deduction for corps
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*****Same rates should apply on sale of pass thru interests
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Other Notes and Assumptions
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§  Calculator is for rough modeling of the difference between investing through a pass thru entity or a C corp
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§  Pass through entities include S corps, partnerships, and single member LLCs
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§  Assumes any salary has been subtracted out of earnings
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§  Does not consider differences between S corps and partnerships/single member LLCs
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§  Assumes all depreciation subject to recapture at ordinary income rates (may not apply to an S corp stock sale)
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Questions and Comments
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Questions, comments, or criticism (criticism being the most valuable):
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Jgerstel@landklegal.com
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https://landklegal.com/joseph-gerstel
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