Rover Corporation would like to transfer excess cash to its sole shareholder, Aleshia, who is also an employee. Aleshia is in the 24% tax bracket, and Rover is subject to a 21% rate. Because Aleshia's contribution to the business is substantial, Rover believes that a $106,800 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $106,800 dividend because the tax rate on dividends is lower than the tax rate on compensation. a. Regarding taxes, which would benefit Aleshia the most? The $135,600 dividend because after taxes she would have $ from the dividend and $ from the bonus.
b. Regarding taxes, which would benefit Rover Corporation the most?
The $135,600 bonus because it would save Rover $ in taxes.
c. Considering the two parties together, which alternative would provide the most overall tax savings?
The $135,600 bonus because when the overall effect to both the corporation and the shareholder are considered the net tax savings is $.