Sales for J. P. Hulett Inc. during the past year amounted to $3.6million. Gross profits totaled $1.01 million, and operating and depreciation expenses were $499,000 and $348,000, respectively. Dividend income for the year was $14,000, which was paid by a firm in which Hulett owns
85
percent of the shares. Use the corporate tax rates shown:
Taxable Income Marginal Tax Rate
$0−$50,000 15%
$50,001−$75,000 25%
$75,001−$100,000 34%
$100,001−$335,000 39%
$335,001−$10,000,000 34%
$10,000,001−$15,000,000 35%
$15,000,001−$18,333,333 38%
Over $18,333,333 35%
to Comcute thecorporation's tax liability. What are the firm's average and marginal tax rates?
The firm's tax liability for the year is
$
Operating Profits = Gross Profits - Operating Expenses - Depreciation Expenses
= $1,010,000 - $499,000 - $348,000 = $163,000
Taxable Income = Operating Profits - (Dividend Income - 70% Exculsion)
= $163,000 - [$14,000 - (0.70 * $14,000)]
= $163,000 - [$14,000 - $9,800]
= $163,000 - $4,200 = $158,800
a). Tax Liability = Taxable Income * Tax Rate
= [$50,000 * 0.15] + [($75,000 - $50,000) * 0.25] + [($100,000 - $75,000) * 0.34] + [($158,800 - $100,000) * 0.39]
= $7,500 + $6,250 + $8,500 + $22,932 = $45,182
b). Average Tax Rate = Tax LIability / Taxable Income
= $45,182 / $158,800 = 0.2845, or 28.45%
c). Marginal Tax Rate = 39%
As the tax rate charged on the next earned dollar is 39%
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