Question: Robin Corporation would like to transfer excess cash to its

Robin Corporation would like to transfer excess cash to its sole shareholder, Adam, who is also an employee. Adam is in the 28% tax bracket, and Robin is in the 34% bracket.
Because Adam’s contribution to Robin’s profit is substantial, Robin believes that a $25,000 bonus in the current year is reasonable compensation and should be deductible in full. However, Robin is considering paying Adam a $25,000 dividend because Adam’s tax rate on dividends is lower than his tax rate on compensation. Is Robin correct in believing that a dividend is the better choice? Why or why not?

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  • CreatedMay 25, 2015
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