Question

P Corporation is a publicly held corporation which owns 10% of S Corporation’s stock. S Corporation has taxable income of $100,000 and distributes a $50,000 dividend to P. P has taxable income of $1,000,000 before the dividend.

a. P’s corporate income tax is $345,100 on $1,015,000 of taxable income. S Corporation tax is $22,250

b. P’s corporate income tax is $345,100 and S’s corporate income tax is $34,000.

c. P Corporation owes AMT.

d. None of the above

***Explain answer.

Answer 1

Correct answer is option a) P’s corporate income tax is $345,100 on $1,015,000 of taxable income. S Corporation tax is $22,250.

Explanation;

i.Calculation of S’s Corporation Tax

        S’s Corporation Taxable income = $1,00,000

        As per Corporate Tax Rate, if Taxable Income were;

                                $0 - $ 50,000 @ 15%                                  = $7,500

                                $50,000 - $75,000 @25%)                          = $6,250

                                $75,000 - $1,00,000 @ 34%                       = $8,500

Therefore, Total Corporate Tax                                                = $7,500+ $6,250 +$8,500

                                                                                                        = $22,250

i.Calculation of P’s Corporation Tax

P’s Corporation Taxable income before dividend = $1,000,000

P corporation can deduct 70% of dividends of $50,000 which received from S corporation in determining taxable income, since the percent of ownership is less than 20% (ie.,10% given in question) under the Tax Deduction named ‘Dividend Received Deduction’.

Therefore,

P’s Corporation Taxable income After dividend

                                            = $1,000,000 + $15000 (70% deducted from dividend $50,000)

                                            = $1,015,000

As per Corporate Tax Rate, if Taxable Income were;

                          

Therefore, Total Corporate Tax                                        = $1015000* 34%

                                                                                                  = $3,45100