RJS Corporation has taxable income of $800,000 and will pay a $100,000 dividend out of these earnings. If the corporation's tax rate is a flat 40 percent, it will pay $320,000 in taxes ($800,000 x 40 percent).
Had the corporation been able to deduct the dividend, it would have paid only $280,000 in taxes ($700,000 x 40 percent). Its taxable income would have been lowered by $100,000, and its taxes lowered by $40,000 ($100,000 x 40 percent).
In addition, the shareholder will have to pay tax on the $100,000 received as a dividend. If the individual's tax rate is 35 percent, then the individual tax on the dividend income would be $35,000, making the full tax burden on the dividend payment $75,000.