A C corporation earns $7.40 per share before taxes.The corporate tax rate is 39%,the personal tax rate on dividends is 15%,and the personal tax rate on non-dividend income is 36%.What is the total amount of taxes paid if the company pays a $5.00 dividend?

Question

Quizplus · Accepted Answer

First, the corporation will pay taxes on its earnings before distributing any dividends:

$7.40 earnings per share * 0.39 corporate tax rate = $2.886 in corporate taxes

Next, the corporation will distribute $5 per share as dividends, and individuals who receive these dividends will pay personal taxes.

Individuals will first pay taxes on the dividends at a rate of 15%:

$5 dividend per share * 0.15 personal tax rate on dividends = $0.75 in personal taxes on dividends

Individuals will also pay personal taxes on any non-dividend income they receive. Assuming they have no other income besides the dividend, an additional $1.40 per share ($7.40 earnings per share - $5 dividend per share) would be considered non-dividend income.

$1.40 non-dividend income per share * 0.36 personal tax rate on non-dividend income = $0.504 in personal taxes on non-dividend income

The total amount of taxes paid is the sum of the corporate taxes and personal taxes:

$2.886 + $0.75 + $0.504 = $4.14

Therefore, the closest answer choice is (C) $3.64, which is the amount of taxes paid after rounding to the nearest cent.

A C Corporation Earns $7