Lena Is the Sole Shareholder and President of Gold Corporation

question 130

Essay

Lena is the sole shareholder and president of Gold Corporation. She feels that she can justify at least a $50,000 bonus this year because of her performance for the company. However, rather than a bonus in the form of a salary, she considers having Gold pay her a $50,000 dividend. She believes this would be preferable because it will be taxed at only 15% instead of her marginal rate of 35%. Her CPA has advised her to pay a $75,000 bonus in lieu of the $50,000 dividend. Assuming that Gold Corporation is in a 34% tax bracket, should Lena take the $50,000 dividend or the $75,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Gold and to Lena.

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