4. Calculate the combined marginal tax rate for ordinary income and the combined

Question

4. Calculate the combined marginal tax rate for ordinary income and the combined rate for capital gains Federal Corporate Marginal Tax Rate (Ordinary Income): 34.00 % State Corporate Marginal Tax Rate (Ordinary Income): 12.12 % Combined marginal tax rate on ordinary income- Combined Corporate Tax Rate for Capital Gains 50% of combined rate for ordinary income Combined Corporate Tax Rate for Capital Gains: = Use these tax rates to calculate after-tax cash flow for selling the asset in each of the following four scenarios. Fill in all the blanks in the table. Cost Basis Salvage Value (Selling Price Book Value Asset Held Scenario1 $45,000 $23,000 $29,000 6 month:s Scenario2 $45,000 $29,000 $23,000 6 months Scenario 3 $45,000 $55,000 $20,000 3 years Scenario 4 S45,000 $55,000 $20,000 6 month:s ordinary income capital gain / loss corporate income taxes after-tax cash flow

Explanation / Answer

Answer:

Calculation of Combined Marginal Tax rates:

= 34% + 7.99%*

= 41.99 %

* Note: Effective state corporate tax = (100% - federal corporate tax rate) multiplied by state corporate tax rate

= 20.99%

Ordinary Income consists of income earned in the ordinary course of business or profession for ex: salary, wages, value of service provided, value of inventory sold, income earned in the course of employement.

Capital Gains are calculated on sale of capital assets. Capital Gains are calculated by deducting the depreciated value of the asset (or book value) from its selling price. The resultant gains are taxed as per the nature of capital gains i.e. whether they are short term or long term

Calculation of after tax cash flow (Amounts are in $)

* Corporate income tax is not payable in case of loss

Scenario 1 Scenario 2 Senario 3 Scenario 4 Cost Basis 45,000 45,000 45,000 45,000 Salvage Value(Selling Price) 23,000 29,000 55,000 55,000 Book Value 29,000 23,000 20,000 20,000 Asset held 6 months 6 months 3 years 6 months Ordinary Income Nil Nil Nil Nil Capital Gain/(loss) (6,000) 6,000 35,000 35,000 Corporate Income Taxes Nil * 2,519.4 7,346.5 14,696.5 After tax cash flows -6,000 3,480.6 27,653.5 20,303.5

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