Charleston Corporation (CC) now operates as a \"regular\" corporation, but it is

Question

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 38%. The firm earns $3,000,000 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 40% and the personal tax rate is 38%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

$8,234

$6,507

$6,250

$7,697

$7,440

$8,234

$6,507

$6,250

$7,697

$7,440

Explanation / Answer

Income to each shareholder in caase of S corporation=3000000*1%*(1-38%)=18600
Income to each shareholder in case of regular corporation=3000000*1%*(1-40%)*(1-38%)=11160

Hence, savings=7440
Option e

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