Crocker and Company (CC)is a C corporation. For the year, CC reported taxable income of $550,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income?
A)18.8%
B)23.8%
C)21%
D)39.8%
E)44.8%

Question

Quizplus · Accepted Answer

The overall tax rate on Crocker and Company's pretax income can be calculated using the following formula:
Overall tax rate = (Total tax paid by CC + Total tax paid by Jimmy on dividends) / CC's pretax income
Total tax paid by CC = $550,000 x 21% (federal corporate tax rate) = $115,500
Total tax paid by Jimmy on dividends = ($550,000 - $115,500) x 23.8% = $109,110
Therefore, overall tax rate = ($115,500 + $109,110) / $550,000 = 39.8% (rounded to the nearest tenth)
Hence, the answer is D (39.8%).

Crocker and Company (CC)is a C Corporation