Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $566,500. 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 the corporation's pretax income includes both the corporate income tax rate and the shareholder's tax rate on dividends. The corporate income tax rate for the year 2020 is a flat 21%. Therefore, the corporate income tax paid by CC is ($566,500 × 21%) = $119,085. The after-tax amount distributed to Jimmy is ($566,500 − $119,085) = $447,415. Since Jimmy's marginal tax rate on dividends is 23.8%, the amount of tax he pays on the dividend is ($447,415 × 23.8%) = $106,544. Therefore, the overall tax rate on CC's pretax income is ($119,085 + $106,544) ÷ $566,500 = 39.8%.

Crocker and Company (CC) Is a C Corporation