charleston corporation (cc) now operates as a \regular\ corporation, but it is considering a switch to s…

charleston corporation (cc) now operates as a \regular\ corporation, but it is considering a switch to s corporation status. cc is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. the firm earns $3,700,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. assume that the corporate tax rate is 34% and the personal tax rate is 35%. how much more (or less) spendable income would each stockholder have if the firm elected s corporation status?\n$10,139\n$7,605\n$8,177\n$8,749\n$6,787

charleston corporation (cc) now operates as a \regular\ corporation, but it is considering a switch to s corporation status. cc is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. the firm earns $3,700,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. assume that the corporate tax rate is 34% and the personal tax rate is 35%. how much more (or less) spendable income would each stockholder have if the firm elected s corporation status?\n$10,139\n$7,605\n$8,177\n$8,749\n$6,787

Answer

Explanation:

Step1: Calculate dividends per - stockholder as a regular corporation

The firm's pre - tax earnings are $3,700,000. The corporate tax rate is 34%. So the after - tax earnings (dividends) of the firm are $3,700,000\times(1 - 0.34)=3,700,000\times0.66 = 2,442,000$. Each of the 100 stockholders owns 1% of the stock, so each stockholder's dividend is $\frac{2,442,000}{100}=24,420$. Then, the stockholder pays personal tax on this dividend at a rate of 35%. The after - personal - tax income is $24,420\times(1 - 0.35)=24,420\times0.65 = 15,873$.

Step2: Calculate dividends per - stockholder as an S corporation

As an S corporation, the firm does not pay corporate income tax. Each stockholder reports 1% of the pre - tax earnings on their personal tax return. Each stockholder's pre - tax income is $\frac{3,700,000}{100}=37,000$. After paying personal tax at a rate of 35%, the after - tax income is $37,000\times(1 - 0.35)=37,000\times0.65 = 24,050$.

Step3: Calculate the difference in spendable income

The difference in spendable income per stockholder is $24,050−15,873 = 8,177$.

Answer:

$8,177$