Reference no: EM133108467

Question - Ms. Barstow purchased a limited interest in Quinnel Partnership in 2021. Her share of the partnership's 2021 business loss was $5,000. Unfortunately, Ms. Barstow couldn't deduct this loss because she had no passive activity income, so she is carrying it forward into 2022. Quinnel Partnership projects that it will operate at breakeven (no income or loss) for several years. However, Ms. Barstow believes that her partnership interest is a solid long-term investment, and she has no plans to sell it.

On January 1, 2022, Ms. Barstow must decide between two new investments that are comparable in terms of risk and liquidity. She could invest $100,000 in TNB Limited Partnership, and her share of the partnership's 2022 business income would be $8,000. Alternatively, she could invest $100,000 in a high-yield bond fund that promises a 10 percent return. (Ms. Barstow would receive $10,000 interest income in 2022.) Use Tax rates for capital gains and qualified dividends.

Required - Compute the after-tax cash flow and after-tax return of investing in TNB Limited Partnership and the high yield bond fund assuming Ms. Barstow has a 24 percent marginal tax rate on ordinary income and is not subject to the Medicare contribution tax.