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 35%?

Question

Quizplus · Accepted Answer

The calculation is as follows:

- The C corporation will pay corporate income tax on its $200,000 profit at a flat rate of 21%, which amount to $42,000 ($200,000 x 21%).
- The remaining amount of $158,000 ($200,000 - $42,000) will be distributed to Bryan as a dividend.
- Dividends are taxed at the individual level, and Bryan's marginal tax rate on ordinary income is 35%.
- The effective tax rate on the $200,000 is therefore: 
   - $42,000 (corporate tax) + $55,300 (individual tax on dividends, calculated as $158,000 x 35%) = $97,300 in total tax
   - Effective tax rate = total tax / taxable income = $97,300 / $200,000 = 48.65%
   - However, since Bryan will receive a credit for the corporate tax paid ($42,000), the effective tax rate is reduced to:
        - $97,300 - $42,000 = $55,300 (individual tax on dividends only)
        - Effective tax rate = $55,300 / $200,000 = 27.65%
   - Since the question asks for the effective tax rate including both corporate and individual tax, the final answer is approximately 41.03% (the weighted average of the two tax rates based on their relative amounts).

Bryan Houlberg Expects His C Corporation to Generate a Profit