What is your CFO is doing with your Corporation Bonds and or Stock Dividends or Corporate Taxes?

What is your CFO is doing with your Corporation Bonds and or Stock Dividends or Corporate Taxes

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An organization's income generation is effected by the federal income tax system progressive characteristic due to the change that occurred in 1987, that affected expenses such as depreciation and tax credit. There has been instances where the principal method used to eliminate that situation was the introduction of the Alternative Minimum Tax (AMT). Consequently, Organization would use Corporate Tax Rate of each year, to figure out their Federal Income Tax. To illustrate this situation, I used some numbers from Brigham, 2008), and find out that The Wendt Corporation had Federal Income Tax of $3,575,000.00.

With such loophole, many corporations started to manipulate their source of income to continue benefiting from it, as it was before 1987. Two main solutions became predominantly applicable: Interest Income from bonds and stock dividends. Corporations Leaders started to take in account their organization's income generation by deciding between investing in bonds or in stocks. It became obvious that:" interest and dividend income received by a corporation is taxed as ordinary income at regular corporate tax rate. However, 70% of dividends received by one corporation from another is excluded from taxable income, while remaining 30% is taxed at the ordinary tax rate" (Brigham, 2008, p.107). As an example, I calculated tax interest income of The Wendt Corporation as $ 350,000.00 and its tax on dividend income as $105,000.00 (Table1,2 and 3). Hence, this difference should incite any corporate manager, in charge of investments decisions, to opt any solution that would maximize corporate investments, by choosing to take the money for example to municipal bonds, instead of stocks.

In brief, I would prefer combining, at a same rate bonds and/or stocks, if asked by a Financial Executive Officer (CFO) of a certain Corporation, where to take their money for investment.

Reference:

Brigham, E. F., & Ehrhardt, M. C. (2008). Financial management: Theory and practice (12th Ed.). Mason, OH: South-Western. ISBN: 9780324422696

Calculation Table 1: Federal Income Tax

To find the base amount of tax:

$ 3,400,000

To find the marginal tax rate:

0.35

To find the marginal income to be taxed:

$ 500,000

$ 175,000

Total tax liability:

$3,575,000

Calculation Table 2: Tax on Interest Income

To find the base amount of tax:

$ 1,000,000

To find tax rate

0.35

Total tax Interest

$350,000

Calculation Table 3:Tax on Dividend Income

To find tax on Dividend Income:

$ 1,000,000

To find tax rate

0.105

Total tax Dividend Income:

$105,000

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