Consider a S corporation. The corporation earns $10 per share before taxes.

Consider a S corporation. The corporation earns $10 per share before taxes. The corporate tax rate is 39%, the tax rate on dividend income is 25%, and the personal income tax rate is set at 20%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid?

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Expert Solution

$8.00 per share.

Working;

A S corporation is not subjected to corporate tax.

It distributes its earnings to its share holders, this distributions are not dividends since they were not subjected to corporate tax.

This distribution is taxed in the hands of the shareholder at his personal income tax rate.

Since the personal income tax rate given in the problem is 20%, the shareholder's earnings after all corressponding taxes are paid = $10 earning *(1-0.20 tax)

=>$8.00.

jeff jeffy answered 1 year ago

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