Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus. Assume that the tax rates are 24% for Kristen and 21% for Egret Corporation. Question Content Area a. How much better off would Kristen be if she were paid a dividend rather than salary? If Kristen were paid a bonus, she would receive $fill in the blank bcbd0cf5affa04c_1 22,800 after taxes. If Kristen receives a dividend rather than salary, she would receive $fill in the blank bcbd0cf5affa04c_2 25,500 after taxes. Thus, she would be better off by receiving the dividend .
Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus. Assume that the tax rates are 24% for Kristen and 21% for Egret Corporation. Question Content Area a. How much better off would Kristen be if she were paid a dividend rather than salary? If Kristen were paid a bonus, she would receive $fill in the blank bcbd0cf5affa04c_1 22,800 after taxes. If Kristen receives a dividend rather than salary, she would receive $fill in the blank bcbd0cf5affa04c_2 25,500 after taxes. Thus, she would be better off by receiving the dividend .
Chapter19: Corporations: Distributions Not In Complete Liquidation
Section: Chapter Questions
Problem 48P
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Question
Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus.
Assume that the tax rates are 24% for Kristen and 21% for Egret Corporation.
Question Content Area
a. How much better off would Kristen be if she were paid a dividend rather than salary?
If Kristen were paid a bonus, she would receive $fill in the blank bcbd0cf5affa04c_1
22,800
after taxes. If Kristen receives a dividend rather than salary, she would receive $fill in the blank bcbd0cf5affa04c_2
25,500
after taxes. Thus, she would be better off by receiving the
dividend
.
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Feedback
Closely held corporations have considerable discretion regarding their dividend policies. In the past, the double tax result provided strong motivation to avoid the payment of dividends. Instead, the incentive was to bail out corporate profits in a manner that provided tax benefits to the corporation. Thus, the question becomes this: Should the corporation or the shareholders benefit? In general, the best strategy considers the tax consequences to both parties.
Question Content Area
b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend?
The net after-tax cost of the bonus for Egret Corporation would be $fill in the blank aa04b7f98ff7f9f_1
23,700
and the net after-tax cost for the dividend would be $fill in the blank aa04b7f98ff7f9f_2
. Therefore, Egret would be better off by $fill in the blank aa04b7f98ff7f9f_3
6,300
if it paid the
.
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Feedback
Incorrect
Question Content Area
c. Assume Egret Corporation paid Kristen a salary bonus of $35,000 instead of a $30,000 dividend.
If Egret Corporation were to pay Kristen a salary bonus of $35,000 instead of a $30,000 dividend, Kristen would receive $fill in the blank bf50c300003b01b_1
after taxes. The bonus would cost Egret Corporation $fill in the blank bf50c300003b01b_2
after taxes.
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Feedback
Incorrect
Question Content Area
d. What should Kristen do?
Both Egret Corporation and Kristen are better off with a
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