A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sole individual shareholder?
A) Corporate tax, $31,500; individual tax, $3,000
B) Corporate tax, $48,000; individual tax, $6,400
C) Corporate tax, $31,500; individual tax, $6,400
D) Corporate tax, $0; Individual tax, $48,000

Question

Quizplus · Accepted Answer

The corporation pays taxes on its profits at the corporate tax rate, and then the individual pays taxes on the dividends at their personal tax rate. Assuming a corporate tax rate of 21%, the corporation would pay $150,000 * 21% = $31,500 in taxes. The individual would then pay taxes on the $20,000 in dividends received. Assuming a qualified dividend tax rate of 15% for this individual's tax bracket, the tax on dividends would be $20,000 * 15% = $3,000.

A Business Generates Profits of $150,000