For the Current Year,Birch Corporation,a C Corporation,reports Taxable Income of $400,000

question 49

Essay

For the current year,Birch Corporation,a C corporation,reports taxable income of $400,000 before paying salary to its sole shareholder Elaine.Elaine's marginal tax rate on ordinary income is 33 percent and 15 percent on dividend income.If Birch pays Elaine a salary of $200,000 but the IRS determines that Elaine's salary in excess of $100,000 is unreasonable compensation,what is the overall income tax rate on Birch's $400,000 pre-salary income? Assume Birch's tax rate is 35 percent and it always distributes all after-tax earnings to Elaine.