Charleston Corporation (CC) now operates as a \"regular\" corporation, but it is
ID: 2735480 • Letter: C
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 $2,000,000 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?
$ 2,565
$ 8,580
$ 4,420
$13,000
$11,150
a.$ 2,565
b.$ 8,580
c.$ 4,420
d.$13,000
e.$11,150
Explanation / Answer
What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.
Each share holder was intial tax ed as follows
Profit before tax = 1% of 2,000,000 = 20000
Tax at 34% = 34% of 20000 = 20000 -6800 =13200
Now personal tax of 35% = 4620
Therefore tax = 13200 -4620 =8580
If aonly personal tax is levied tax would be = 35% * 20000
= 13000
therfore each stcok holder will have 13000- 8580
= 4,420
Hence c is the correct answer