Crocker and Company (CC)is a C corporation. For the year, CC reported taxable income of $564,500. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pretax income?
A)18.8%.
B)23.8%.
C)21%.
D)39.8%.
E)44.8%.

Question

Quizplus · Accepted Answer

The overall tax rate on Crocker and Company's pre-tax income can be calculated as follows:

- Calculate CC's corporate tax rate: The corporate tax rate for taxable income over $50,000 is 21%. Therefore, CC's corporate tax liability is 21% of $564,500 = $118,545.

- Calculate CC's after-tax earnings: CC's after-tax earnings are $564,500 - $118,545 = $445,955.

- Calculate Jimmy's tax liability on the dividend income: Jimmy's tax liability on the dividend income is 23.8% of $445,955 = $106,154.

- Calculate Jimmy's overall tax liability: Jimmy's overall tax liability is the sum of his tax liability on the dividend income and his tax liability on CC's pre-tax income (i.e. his share of CC's corporate tax liability). Therefore, his overall tax liability is $118,545 + $106,154 = $224,699.

- Calculate the overall tax rate on CC's pre-tax income: The overall tax rate on CC's pre-tax income is Jimmy's overall tax liability divided by CC's pre-tax income, expressed as a percentage. Therefore, the overall tax rate on CC's pre-tax income is $224,699 / $564,500 = 39.8%.

Therefore, the best choice is D, with the explanation outlined above. The other answer choices are not accurate.

Crocker and Company (CC)is a C Corporation