Question

QUESTION 2

1. Consider a C corporation. The corporation earns $8 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 83% of its earnings to its shareholders as a dividend. The corporate tax rate is 41%, the tax rate on dividend income is 26%, and the personal income tax rate is set at 24%. How much is the total effective tax rate on the corporation earnings

Answer 1

C Corporation earns $8 per share before taxes

Assume : C Corporation has 1,000 shares

Total Earning = No of shares *earning per share = 1,000*8 = $8,000

Corporate tax = 41%

Total tax paid = Total Earnings * 41% = 8,000*41% = $3,280

Earning After Tax = Earning before tax - Total tax paid = 8,000 - 3,280 = $4,720

Dividend = 83% of Earning after tax = 83%*$4,720 = $3,917.60

Tax on dividend = 26% of total dividend paid = $3,917.60*26% = $1,018.58

As tax on dividend is receivable for C Corporation so, Net tax paid = Actual tax paid - Tax on dividends

Net Tax paid = $3,280 - $1,018.58 = $2,261.42

Effective tax rate = Net tax paid/Total Earnings = $2,261.42/$8,000 = 28%