ABC Corporation (ABC) now operates as a “regular” C corporation, but it is consi
ID: 2762155 • Letter: A
Question
ABC Corporation (ABC) now operates as a “regular” C corporation, but it is considering a switch to S Corporation status. ABC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $5,000,000 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?
Explanation / Answer
The value of difference in spendable income is calculated with the use of following table:
Each stockholder would received $11,050 extra income from S corporation because of no corporate tax.
Regular Corporation Business Income 5,000,000 Less Corporate Tax (5,000,000*34%) 1,700,000 Income Available for Dividend Distribution to Shareholders 3,300,000 Tax on Dividends (3,300,000*35%) 1,155,000 Spendable Income (Total) 2,145,000 Spendable Income (Each Investor) [2,145,000/100] 21,450 S Corporation Corporate Tax (5,000,000*0) 0 Income Received by Investors 5,000,000 Personal Tax Paid by Investors (5,000,000*35%) 1,750,000 Spendable Income (Total) 3,250,000 Spendable Income (Each Investor) [3,250,000/100] 32,500 Difference in Spendable Income for Each Investor (32,500 – 21,450) $11,050