✏️ Two types of corporate taxation
C Corporation
✏️ You are a shareholder in a C corporation. The corporation earns $5 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend (we make this simplifying assumption, but should note that most corporations retain some of their earnings for reinvestment). The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 40% and your tax rate on dividend income is 15%. How much of the earnings remains after all taxes are paid?
✔
Pre-Tax Income = $5
TC = Corp tax = 40%
TP = Personal Div Tax = 15%
Two ways to approach taxes: (we will use the second)
| 1.) After tax profit for the firm: Net Income = PreTaxIncome - PreTaxIncome * TC = $5 - $5*40% = $3.00 | 2.) After tax profit for the firm: Net Income = Pretax Income * (1-Tc) = $5 * (1-40%) = $5 * (60%) = $3.00 |
After tax income for the investor: (method 2) $3 Dividend * (1-TP) = $3 * (1-15%) = $2.55
S Corporation
✏️ Rework the previous example assuming the corporation in that example has elected subchapter S treatment and your tax rate on non-dividend income is 30%.
✔ Now we redo the problem assuming a tax rate of 30% on non-dividend income.
Two ways to approach taxes: (we will use the second)
1.) After tax profit for the firm: | 2.) After tax profit for the firm Net Income = Pretax Income * (1-Tc) = $5 * (1-30%) = $5 * (70%) = $3.5 |