Crocker and Company, Inc. had taxable income of $550,000. At the end of the year, it distributes all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent. What is the overall tax rate on Crocker and Company's pre-tax income?

Question

Quizplus · Accepted Answer

The overall tax rate includes both corporate tax and dividend tax. First, calculate the corporate tax: $550,000 * 35% = $192,500. The after-tax income is $550,000 - $192,500 = $357,500. Jimmy pays 15% tax on dividends: $357,500 * 15% = $53,625. Total tax paid is $192,500 + $53,625 = $246,125. The overall tax rate is $246,125 / $550,000 = 44.75%, which rounds to 43.9%.