Sarah plans to invest $1 million in a business venture that will last five years. She is debating whether to operate the business as a C corporation or a sole proprietorship. If a C corporation, she will liquidate the corporation at the end of the five-year period. She expects the business to generate taxable income as follows:
Year . . . . . . . . . . . . . . . . . . . . . Taxable Income
1 . . . . . . . . . . . . . . . . . . . . . . . . $40,000
2 . . . . . . . . . . . . . . . . . . . . . . . . 70,000
3 . . . . . . . . . . . . . . . . . . . . . . . . 90,000
4 . . . . . . . . . . . . . . . . . . . . . . . . 150,000
5 . . . . . . . . . . . . . . . . . . . . . . . . 350,000
If incurred in corporate form, these taxable income amounts will be subject to the corporate tax rate schedule. If in proprietorship form, they will be subject to Sarah’s 37% marginal tax rate because she has income from other sources that puts her in the top individual tax bracket. Assume that taxable income from the proprietorship qualifies for the 20% qualified business income deduction such that net taxable amounts are 80% of reported taxable (qualified business) income. Any capital gain upon corporate liquidation will be taxed at 23.8% (the 20% maximum capital gain rate plus the 3.8% rate on net investment income). Assume that Sec. 1202 does not apply.

Required: Determine the after-tax amount Sarah will have at the end of five years under each alternative. Which alternative do you recommend?