Charleston Corporation (CC) now operates as a \"regular\" corporation, but it is

Question

Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,800,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Explanation / Answer

If there is S corp status then investors has to pay tax at two level due to its pass through characteristics.

Corporate Tax Rate at 34% = 2,800,000 * 0.34 = 952,000

To distribute to 100 stockholders. 952,000/100 = 9,520

Now each stockholder pays taxes at 35%

Each people will get = 9520 * 0.65 = $6,188

Double Taxed at the Corporate/Personal Levels

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects