Question

​(Corporate income​ tax)  Sales for J. P. Hulett Inc. during the past year amounted to $ 3.9 million. Gross profits totaled $ 1.09 ​million, and operating and depreciation expenses were $492,000 and $351,000​, respectively. Dividend income for the year was $12,000​, which was paid by a firm in which Hulett owns 85 percent of the shares. Use the corporate tax rates shown in the popup​ window (inserted below)​, to Comcute the​ corporation's tax liability. What are the​ firm's average and marginal tax​ rates?

Taxable Income	Marginal Tax Rate
​$0minus−​$50,000	​ 15%
​$50,001minus−​$75,000	​ 25%
​$75,001minus−​$100,000	​ 34%
​$100,001minus−​$335,000	​ 39%
​$335,001minus−​$10,000,000	​ 34%
​$10,000,001minus−​$15,000,000	​ 35%
​$15,000,001minus−​$18,333,333	​ 38%
Over​ $18,333,333	​ 35%

Answer 1

Given :

Sales $3.9 Million

Gross Profit $1.09 Million

Operating Expenses $492,000

Depreciation $351,000

Dividend Income $12,000

We have taken assumption that given operating expense of $ 492,000includes depreciation $ 351,000. Since depreciation is a non cash operating expenses and will always come under the head of operating Expenses.

J.P Hulett Inc holds 85% share of the firm, from which he earned a dividend of $ 12,000. So, taxable dividend is Zero because where the firm hold more than 80% the entire dividend exempt from tax.

Total taxable dividend = 0

Net Operating income = Gross profit - operating expenses

= 1,090,000 - 492,000

   = 598,000

Since the firm does not have any interest payment the net operating income is a taxable income i.e.$598,000

Step 1
Computation of tax liability
taxable Income	Marginal tax rates	marginal tax computation	Tax liability	Cumulative tax liability
$50,000	15%	$50000*15%	7,500	7,500
$75,000	25%	$(75,000-50000)*25%	6,250	13,750
$100,000	34%	$(100,000 - 75,000)*34%	8,500	22,250
$335,000	39%	$(335,000 - 100,000 )*39%	91,650	113,900
335000 to $ 10,00,000	34%	$(598000 - 335000)*34%	89,420	203,320

Step 2
Firm Average tax rate calculation
Taxable Income	Average Tax Calculation	Average Rate Tax
$50,000	$7500/50000	15.00%
$75,000	$13750/75000	18.33%
$100,000	$22250/100000	22.25%
$335,000	$113900/335000	34.00%
335000 to $ 10,00,000	$203320/598000	34.00%

Even if the firm earns a dollar mare than $598,000 the marginal tax rate remain the same (34%). Next slab applicable only if the taxable income exceed $1,000,000

The Firm Tax liability = $203,320

Average tax rate of firm = 34%

Marginal tax rate of firm = 34%