Charleston 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 35%. The firm earns $2,000,000 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 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status? a. $ 2,565b. $ 8,580c. $ 4,420d. $13,000e. $11,150

c. $ 4,420

Explanation:

In this question, we do the calculations based on the personal tax and corporation tax. So, the computation is shown below:

The profit before tax is $2,000,000

And, it holds 1% if the stock So,

The value would be = $2,000,000 * 1% = $20,000

After applying the corporate tax rate of 34%, the value would be = $20,000 - $20,000 * 34% = $20,000 - $6,800 = $13,200

After applying the personal tax rate of 35%, the value would be = $13,200 - $13,200 * 35% = $13,200 - $4,620 = $8,580

And, the personal tax rate is 35%, so after tax value would be:

= Value - Value * personal tax rate

= $20,000 - $20,000 * 0.35

= $20,000 - $7,000

= $13,000

Now subtract the both values after considering personal tax rate which equals to

= $13,000 - $8,580

= $4,420