Maximizing Your Returns: Calculating After-Tax Earnings Per Share
How to Calculate After-Tax Earnings Per Share?
To calculate after-tax earnings per share as a shareholder in a C corporation, we need to consider both corporate tax and personal tax rates. In this scenario, the corporation earns $1.59 per share before taxes, with a corporate tax rate of 25% and a personal tax rate on all income of 20%. First, we calculate the corporate tax on the earnings per share. The corporate tax rate is 25%, so the tax liability is 25% of $1.59, which equals $0.3975 per share. Subtracting this tax amount from the pre-tax earnings gives us $1.59 - $0.3975 = $1.1925 per share after taxes. After the corporation has paid its taxes, it distributes the remaining earnings to shareholders as dividends. Shareholders are then subject to personal taxes on their dividend income, at a rate of 20%. The amount that remains for you after personal taxes is 80% of $1.1925, which equals $0.954 per share. Therefore, the amount that remains for you as a shareholder after all taxes are paid is $0.954 per share.
Understanding the Calculation Process
Step 1: Calculate Corporate Tax To determine the amount of corporate tax, multiply the pre-tax earnings per share by the corporate tax rate. In this case, $1.59 x 25% = $0.3975 per share. Step 2: Calculate After-Tax Earnings Subtract the corporate tax amount from the pre-tax earnings per share. $1.59 - $0.3975 = $1.1925 per share after taxes. Step 3: Calculate Personal Tax on Dividends Apply the personal tax rate of 20% to the after-tax earnings per share. 20% of $1.1925 = $0.2385. Step 4: Calculate the Amount Remaining for Shareholders Subtract the personal tax amount from the after-tax earnings per share. $1.1925 - $0.2385 = $0.954 per share remaining for shareholders. By following these steps, you can determine the final amount that remains for you as a shareholder after all taxes are paid, maximizing your returns from the corporation's earnings.