Question

The pre-tax earning of a company is $44.96. If the company wants to distribute all of its earnings to its share holders and has a corporate tax rate, dividends tax rate, and person income tax rates of 17.32%, 20.66%, and 12.32%. How much will investors get? (c-corp)

Answer 1

For C-corporations dividends are taxed twice; first time company pays corporate taxes before the distribution of taxes and only profit after tax can be distributed to its shareholders. Second time it is taxed in the hand of shareholders at the rate of personal income tax as it is considered ordinary income for them. Therefore,

The pre-tax earnings of a company = $44.96

Corporate tax rate = 17.32%

Therefore after-tax earnings = $44.96 * (1- 17.32%) = $37.17

All earnings distributed to shareholders, therefore shareholders will get $37.17 before tax

Person income tax rates = 12.32%

So investors will get = $37.17 * (1- 12.32%) = $32.59