Question

Crocker and Company (CC) is a C corporation. For the year, CC reported taxable income of $566,000. At the end of the year, CC distributed all its after-tax earnings to Jimmy, the company's sole shareholder. Jimmy's marginal ordinary tax rate is 37 percent and his marginal tax rate on dividends is 23.8 percent, including the net investment income tax. What is the overall tax rate on Crocker and Company's pre-tax income?

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $18500. At the end of the year, Manley recorded bad debt expense of $22300 and the balance of doubtful accounts had increased to $18,700. What is Manley's deduction for bad debt expense this year?

Answer 1

1.) Corporate Tax Rate = 21%

Tax Paid by the CC Corporation = $5,66,000 * 21%

= $1,18,600

So, Dividend = Pretax Income - Tax

= $5,66,000 - $1,18,600

= $4,47,140

Marginal Tax on Dividend = 23.8%

Tax on Dividend = $4,47,140 * 23.8%

= $1,06,419.32

Total Tax = $1,18,600 + $1,06,419.32

= $2,25,279.32

Overall Tax = Total Tax / Taxable Income

= $2,25,279.32 / $5,66,000

= 39.80%

2.) The bad debt expense represents the direct write-off bad accounts ($22,100) as well as an increase in the allowance account which is an estimate of bad accounts to be written-off in the future ($22,300 - $22,100 = $200). The increase in allowance account cannot be deducted. So, Manley's deduction for bad debts expense this year would be $22,100 ($18,500 + $22,300 - $18,700).