1. A corporation with a taxable income of $50 million is considering a new ventu

Question

1. A corporation with a taxable income of $50 million is considering a new venture that would generate an additional $500,000 per year in taxable income. How much additional federal income tax will they pay on this additional income?

2. Susan has a marginal federal income tax rate of 28% and a marginal state income tax rate of 9%. If she earns an additional $4,000 job by working overtime, how much additional cash will she have after taxes?

3. A business purchases some equipment for $10,000 and depreciates it over a 5-year period using straight-line depreciation. The salvage value at the end of Year 5 is $2,000. What is the depreciation charge for Year 3?

4. The company described in the previous question has a marginal federal tax rate of 35%. Compute the reduction in their federal income tax during Year 3 due to that year's deprecation on the equipment.

Explanation / Answer

1. Since the taxable income of the corporation exceeds $18,333,333, it is covered under the federal tax rate of 35% with no tax base.

Hence, additional federal income tax on additional income = $500,000 * 35% = $175,000

2. Federal income tax = $4,000*28% = $1,120

State income tax = $4,000* 9% = $360

Additional cash after taxes = $4,000 - $1,120 - $360 = $2,520

3 Purchase price = $10,000

Salvage value = $2,000

Depreciable value = $10,000 - $2,000 = $8,000

Annual Depreciation charge = $8,000 / 5 =$1,600

Hence, depreciation charge for year 3 = $1,600

4 Deductible depreciation amount for year 3 = $1,600

Tax savings due to depreciation = $1,600 * 35% = $560

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