Question

A corp is considering paying dividends to shareholders.The corp has a $2.00 of per share earnings before taxes. Corp tax rate is 21%, personal dividend income tax rate is 15%, personal non-dividend income tax is 25% What is the after-tax value that will accure to shareholders if all $2.00 is distributed and the corp is a C-corp. What is the after tax value that would accure to shareholders, but now assume it is an S-corp.

Please show work and some small explanations would be nice, i need to be able to know how to do this myself thanks!

Answer 1

	C Corp.	S Corp.
EBT/EPS(Before Taxes)	2.00	2.00
Corporate Tax at 21%	0.42	0
Net Income	1.58	2.00
Dividends distributed	1.58
Profits distributed		2
Less:Personal tax for dividends( 15%*1.58)	0.237
Less:Personal tax for non-dividends( 25%*2.00)		0.5
After tax value that would accrue to shareholders	1.343	1.50
	(1.58-0.237)	(2-0.5)
Effective tax rate in the case of C Corp.comes to
21%+((1-21%)*15%)=
32.85%
The share holder in C corp.bears a total tax burden of
32.85%*2=	0.657
& receives a net amount of
67.15%*2=	1.343
In case of C corporations , dividends are distributed from after-corportae tax (here 21%) net income . The dividends so distributed are taxed again on the individual shareholder's personal income tax return at the personal tax rate applicable for dividends (here 15%)
Whereas,
S corportaion is not required to pay corporate taxes.
It also distributes profits, but they are not called dividends
These profits are taxed at the personal non-dividend income tax (here 25%), in the individual shareholder's personal IT return.
In the above case,
Effective tax rate in the case of S Corp.comes to 25%
He pays a tax amt. of 0.5 & nets 1.5 income
So, there is double taxation in the case of C Corp., ie taxed twice for the same income-- which is avoided by electing to form a S Corp.