Question

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pre-tax income?

Answer 1

Answer:

overall pre tax rate on pre tax income is 49.71%

Explanation

For calculating the overall tax rate of the Crocker and Company we have to do a step wise calculation where the given info available to us is that CC has -

           taxable income of $550,000

           Jimmy's ordinary and dividend marginal tax rate are 37% and 23.8%

CC pre tax income = Taxable income deducted before distributing to Jimmy

                                                                    +

                                     Tax which is deducted on dividend given to Jimmy

where,

Taxable income deducted before given to Jimmy =

$550,000 - $550,000 x (1 - 34%)

= $550,000 - $550,000 x .66

= $550,000 - 363,000

= $187,000

Tax deducted on dividend given to Jimmy =

 ($550,000 - $187,000) x 23.8%

= $363,000 x .238

= $86,394

Now adding them

$187,000 + $86,394 = $273,394

Overall tax rate = $273,394 / $550,000

                            = .49708 ( multiply by 100 to make in percentage)

                             = 49.71%