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 $2,800,000 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?

The correct answer is $6,188.

Explanation:

According to the scenario, each stock holder will give both tax from their earnings.

Total stockholder = 100

Total earning = $2,800,000

So, Earning before tax per stock holder = $2,800,000 ÷ 100 = $28,000

Now corporate tax rate = 34%

So Earning after deducting corporate tax = $28,000 - ($28,000 × 34%)

$28,000 - $9,520 = $18,480

Now personal tax = 35%

So, earning after deduction of personal tax = $18,480 - ($18,480 × 35%)

= $18,480 - $6,468 = $12,012

If only personal tax is made, then

Earning after only personal tax = $28,000 - ($28,000 × 35%)

= $28,000 - $9,800 = $18,200

So, each stockholder get = $18,200 - $12,012

= $6,188