Rotana Construction, Inc., has operated for the last 21 years in a northern U.S.
ID: 2405033 • Letter: R
Question
Rotana Construction, Inc., has operated for the last 21 years in a northern U.S. state where the state income tax on corporate revenue is 6% per year. Rotana pays an average federal tax of 23% and reports taxable income of $7 million. Because of pressing labor cost increases, liability insurance premium increases, and other cost increases, the president wants to move to another state to reduce the total tax burden. The new state may have to be willing to offer tax allowances or an interest-free grant for the first couple of years in order to attract the company. You are an engineer with the company and are asked to determine the effective tax rate for Rotana.
Explanation / Answer
State taxes can be deducted from computation of taxable income for federal taxes.
State income tax = 7,000,000 x 6% = 420,000
Therefore taxable revenue for federal tax = 7,000,000 - 420,000 = 6,580,000
Federal tax on the above income = 6,580,000 x 23% = 1,513,400.
Total taxes = 420,000 + 1,513,400 = 1,933,400
Effective tax rate = Total tyax / Total income before tax = 1,933,400 / 7,000,000 = 27.62%
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