For the current year, Birch Corporation, a C corporation, reports taxable income
ID: 2426793 • 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.
Explanation / Answer
Birch's Taxable Income 400000 Elain's Salary 100000 Net Taxable Income 300000 Tax @35% 105000 Overall Income tax rate on presalary Income =105000/400000*100 26.25