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 $3,700,000 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? Group of answer choices $7,605 $6,787 $10,139 $8,749 $8,177

Answer 1

Answer:

-2923

Explanation:

To calculate how much more (or less) spendable income would each stockholder has if the firm elected S Corporation status we need to calculate Profit attributable to each stockholder according to their holding percentage and will deduct the corporation tax on that.

DATA

No of stockholders = 100

Holding % = 1% each stock holder

Tax rate = 35%

Profit before tax = $3,700,000

Corporate tax = 34%

Profit before tax = 1% of 3,700,000 = 37,000

Tax (34%) = 34% of 37,000 = 12580

Profit after tax = 37,000 - 12,580 = 24,420

Now personal tax of 35% = 8547

Therefore tax = 24,420 - 8547 = 15,873

If only personal tax is levied tax would be = 35% * 37,000 = 12,950

therefore each stockholder will have 12,950 - 15,873 = -2923