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Is Rover correct in believing that a dividend is the better

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Problem - 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 $25,000 bonus in the current year is reasonable compensation and should be deductible by the corporation. However, Rover is considering paying Aleshia a $25,000 dividend because the tax rate on dividends is lower than the tax rate on compensation. Is Rover correct in believing that a dividend is the better choice? Why or why not?

Reference no: EM132645633

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