Question

You are a shareholder in an S corporation. The corporation earns $1.88 per share before taxes. As a pass-through entity, you will receive $1.88 for each share that you own. Your marginal tax rate is 25%. How much per share is left for you after all taxes are paid?

A) $1.18
B) $1.41
C) $1.41
D) $1.88

Answer 1

As a shareholder in an S corporation, after being taxed at a marginal rate of 25%, $1.41 would be left per share after all taxes are paid on earnings of $1.88 per share.

Step-by-step explanation:

If you are a shareholder in an S corporation and the corporation earns $1.88 per share before taxes, the amount you receive is not reduced by corporate taxes because S corporations are pass-through entities. This means that the profits are passed directly to shareholders and are taxed at the shareholders' individual tax rates. With a marginal tax rate of 25%, you would pay taxes of 25% percent on the $1.88 per share you receive.

To calculate the after-tax amount per share, you would multiply the earnings per share by the remaining percentage after taxes, 100% - 25% = 75%. Therefore, $1.88 × 0.75 = $1.41. So you are correct if you chose option B) $1.41 as the amount left per share after all taxes are paid.