Problem: Orange Corporation would like to transfer excess cash to its sole shareholder, Danielle, who is also an employee. Danielle is in the 28% tax bracket, and Orange is in the 34% bracket. Because Danielles contribution to the business is substantial, Orange believes that a $50,000 bonus in the current year is reasonable compensation and should be deductible by the corporation.
However, Orange is considering paying Danielle a $50,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Is Orange correct is believing that a dividendis the better choice? Why or why not?