Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%?
A) 21%
B) 58%
C) 36.8%
D) 37%

Question

Quizplus · Accepted Answer

- The corporate tax rate for a C corporation with a taxable income of $200,000 is 21%, which equals to $42,000 ($200,000 x 21%).
- After paying the corporate tax, the corporation has $158,000 ($200,000 - $42,000) left for distribution.
- As a dividend recipient, Bryan has to pay 20% dividend tax rate on the $158,000, which equals to $31,600 ($158,000 x 20%).
- Bryan also has to pay his marginal tax rate of 37% on the $158,000 dividend, which equals to $58,460 ($158,000 x 37%).
- Therefore, the total tax paid on the $200,000 profit is $131,060 ($42,000 + $31,600 + $58,460), which is an effective tax rate of 65.53% ($131,060 / $200,000).
- However, the effective tax rate only on the amount distributed as a dividend to Bryan is 36.8% ($90,060 / $158,000), which is the closest option to the correct answer.

Bryan Houlberg Expects His C Corporation to Generate a Profit