alway Corporation (CC) now operates as a \"regular\" corporation, but it is cons

Question

alway Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 26%. The firm earns $3,000,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 30% and the personal tax rate is 26%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Explanation / Answer

S Corps do not have to pay tax on their income. Rather only the shareholders are taxed like partnerships.

The Income earned during the year = $ 3,000,000 before tax

If the Company runs as a regular corporation, it will pay tax 30%*3,000,000 = $900,000

The remaining = 2100,000 is distributed to equity shareholders

Each shareholder gets 1% = $21000

Then he is taxed @ 26% = 5460

Remaining income = $15540

Now if the company converts to S-Corp, each shareholder will get 1%*3000000 = $30,000

He will simply pay the personal income tax = 26%*30,000 = 7800

Spendable income in hand = $22,200

Additional income with each shareholder = 22,200 - 15540 = 6,660

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