For the current year, Birch Corporation, a C corporation, reports taxable income
ID: 2426540 • Letter: F
Question
For the current year, Birch Corporation, a C corporation, reports taxable income of $400,000 before paying salary to its sole shareholder Elaine. Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income. If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation, what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.
I had asked this question but was not given a rate, an explination only. Can someone please help?
Explanation / Answer
A TAXABLE INCOME 400000 B aurthorised compensation as per IRS 100000 C=(A-B) INCOME BEFORE TAX 300000 D TAX@35% 105000 E=C-D INCOME AFTER TAX(DIVIDEND) 295000 F=E*15% TAX ON DIVIDEND@15% 44250 G=B*33% TAX ON SALARY 33000 H=C+G+F TOTAL TAXES PAID 182250 I=H/A*100 OVERALL TAX % 45.5625