Problem based on marginal tax bracket


Penguin Corporation, a C corporation, has two equal shareholders, Bob and Leo. Penguin earned $100,000 net profit during its first year of operations and paid a dividend of $50,000 to each shareholder. Before considering the dividend, Bob is in the 10% marginal tax bracket and Leo is in the 28% marginal tax bracket. Which of the following statements is incorrect?

a. $100,000 will be subject to double taxation.

b. Penguin could have avoided paying corporate tax if, instead of paying a dividend, it had paid Bob and Leo a salary of $50,000 each (assuming a $50,000 salary for each is reasonable).

c. A preferential tax rate will apply to the dividend income of both Bob and Leo.

d. If Penguin had paid Bob and Leo a salary of $50,000 each, Bob would have paid less Federal income tax on his salary than Leo would have paid on his salary.

e. None of the above.

Request for Solution File

Ask an Expert for Answer!!
Accounting Basics: Problem based on marginal tax bracket
Reference No:- TGS081453

Expected delivery within 24 Hours