Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $150,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $150,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice. a. Regarding taxes, which would benefit Aleshia the most? The $150,000 dividend ✓✔ because after taxes she would have $ bonus. b. Regarding taxes, which would benefit Rover Corporation the most? The $150,000 bonus ✓ because it would save Rover $ from the dividend and $ 31,500 ✓in taxes. from the c. Considering the two parties together, which alternative would provide the most overall tax savings? The $150,000 bonus ✓ because when the overall effect to both the corporation and the shareholder are considered the net tax savings
Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $150,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $150,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice. a. Regarding taxes, which would benefit Aleshia the most? The $150,000 dividend ✓✔ because after taxes she would have $ bonus. b. Regarding taxes, which would benefit Rover Corporation the most? The $150,000 bonus ✓ because it would save Rover $ from the dividend and $ 31,500 ✓in taxes. from the c. Considering the two parties together, which alternative would provide the most overall tax savings? The $150,000 bonus ✓ because when the overall effect to both the corporation and the shareholder are considered the net tax savings
Chapter19: Corporations: Distributions Not In Complete Liquidation
Section: Chapter Questions
Problem 23CE
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Transcribed Image Text:Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax
bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $150,000
bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying
Aleshia a $150,000 dividend because the tax rate on dividends is lower than the tax rate on compensation.
Answer the following questions to determine whether Rover is correct in believing that a dividend is the better choice.
a. Regarding taxes, which would benefit Aleshia the most?
The $150,000 dividend ✔ because after taxes she would have $
bonus.
b. Regarding taxes, which would benefit Rover Corporation the most?
The $150,000 bonus ✔ because it would save Rover $
from the dividend and $
31,500 ✓in taxes.
from the
c. Considering the two parties together, which alternative would provide the most overall tax savings?
The $150,000 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings
is $
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