You are a shareholder in a corporation which has elected chapter S treatment.The corporation announces a profit of $6 per share,of which it retains $2 for reinvestment and distributes the rest as dividend payments.Given that the personal tax rate is 35%,how much tax must you pay per share?

Question

Quizplus · Accepted Answer

Chapter S corporations are pass-through entities, meaning that shareholders are taxed on their share of the corporation's income. In this case, the corporation is distributing $4 per share as dividends, and since dividends are taxed at a lower rate than ordinary income, the shareholder will owe 35% of $4, or $1.40, in taxes. However, since the corporation is retaining $2 for reinvestment, the shareholder will not owe any tax on that portion of the profit. Therefore, the total tax owed per share is $1.40, which is closest to answer choice B ($2.10 is greater than $1.40, while $2.60 and $3.90 are much greater).

You Are a Shareholder in a Corporation Which Has Elected