Big Mack Company, which has a 27% marginal tax rate, plans to make an investment that should generate cash flow of $300,000. Instead of making the investment directly, Big Mack could form a new taxable entity (Little Mack) to make the investment. Little Mack's marginal tax rate on the investment income would be only 20%. However, Little Mack would have to incur a $25,000 nondeductible expense associated with the investment that Big Mack would not incur.

A. Should Big Mack make the investment directly or make it through Little Mack to maximize after-tax cash flow?You must show your work in order to justify your answer.

B. Would your answer change if Little Mack could deduct its $25,000 additional expense?Again, you must show your work to justify your answer.

C. Identify the tax planning variable suggested by the situation above?

Answer rating: 100% (QA)

As per given details please refer below answer Part A When non deductible expenses We need to calcul... View the full answer