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Jabar Corporation, a C corporation, projects that it will have taxable income of $530,000 before incurring...

Jabar Corporation, a C corporation, projects that it will have taxable income of $530,000 before incurring any lease expenses. Jabar’s tax rate is 35 percent. Abdul, Jabar’s sole shareholder, has a marginal tax rate of 39.6 percent on ordinary income and 20 percent on dividend income. Jabar always distributes all of its after-tax earnings to Abdul. (Input all answers as positive numbers. Do no round any intermediate percentages. Round your answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

a. What is the amount of the overall tax (corporate level + shareholder level) on Jabar Corp.’s $530,000 pre-lease expense income if Jabar Corp. does not lease property from Abdul and it distributes all of its after-tax earnings to its sole shareholder Abdul (include the net investment income tax in your calculations)?

b. What is the amount of the overall tax on Jabar Corp.’s $530,000 pre-lease expense income if Jabar leases equipment from Abdul at a cost of $53,000 for the year (include the net investment income tax on the dividend and on the rental income received by Abdul)?

c. What is the amount of the overall tax on Jabar Corp.’s $530,000 pre-lease expense income if Jabar Corp. leases equipment from Abdul at a cost of $53,000 for the year but the IRS determines that the fair market value of the lease payments is $48,000 (include the net investment income tax on the dividend and rental income received by Abdul)?


      
Taxable income before lease payment
Lease payment
Taxable income
Entity tax
After-tax entity earnings
Abdul’s tax on dividends
Abdul’s tax on lease payment
Overall tax


      

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Answer #1
Without lease $53,000 Lease Deduction $48,000 Lease Deduction Remarks
Taxable income before lease payment (1) 530,000 530,000 530,000 NA
Lease payment (2) 0 53,000 48,000 NA
Taxable income (3) 530,000 477,000 482,000 (1) - (2)
Entity tax (4) 185500 166950 168700 (3) * 35%
After-tax entity earnings (5) 344,500 310,050 313,300 (3) - (4)
Abdul’s tax on dividends (6) 68900 62010 62660 (5) * 20%
Abdul’s tax on lease payment (7) 0 20988 19008 (2) * 39.6%
Overall tax (8) 254400 249948 250368 (4) + (6) + (7)
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