Question

In: Finance

You own 100 shares of a Sub Chapter​ "S" corporation. The corporation earns​ $5.00 per share...

You own 100 shares of a Sub Chapter​ "S" corporation. The corporation earns​ $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are​ due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is​ 21% and your personal tax rate on​ (both dividend and nonminus−​dividend) income is​ 30%, then how much money is left for you after all taxes have been​ paid?

A. ​$500

B. ​$350

C. ​$210

D. ​$300

Solutions

Expert Solution

Given,

No. of shares = 100 shares

Earnings per share = $5

Corporate tax rate = 21% or 0.21

Personal tax rate = 30% or 0.30

Solution :-

Actually, Sub chapter 'S" corporation does not pay corporate tax on its income where as sub chapter 'C' corporation pays corporate taxes on its income. So, corporate tax rate is not considered in case of sub chapter'S' corporation's income, only personal tax rate is considered.

Money left = No. of shares x earnings per share x (1 - personal tax rate)

= 100 shares x $5 x (1 - 0.30)

= $500 x 0.70 = $350

So, money left for you is $350.


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