Able is considering what form of entity to operate a new business. The new busin
ID: 2527370 • Letter: A
Question
Able is considering what form of entity to operate a new business. The new business's projected income and losses for the first two years of operation, as well as Able’s income from other sources, are listed in the table below.
What will be the total annual tax cost for the new venture and the owner for years 1 and 2?
All numbers in (000)
Year 1
Year 2
New Business
Revenue from Sales
50,000
70,000
Deductible Expenses
60,000
30,000
Federal Corporate Income Tax Rate
35%
35%
Able's Taxable Income from Other Sources
40,000
50,000
Federal Individual Income Tax Rate
39%
39%
All numbers in (000)
Year 1
Year 2
New Business
Revenue from Sales
50,000
70,000
Deductible Expenses
60,000
30,000
Federal Corporate Income Tax Rate
35%
35%
Able's Taxable Income from Other Sources
40,000
50,000
Federal Individual Income Tax Rate
39%
39%
Explanation / Answer
Federal Corporate Income Tax (Year 1) = (50000-60000)x35% = $ (3500)
Federal Corporate Income Tax (Year 2) = (70000-30000)x35% = $ 14000
Federal Individual Income Tax (Year 1) = 40000x39% = $ 15600
Federal Individual Income Tax (Year 2) = 50000x39% = $ 19500
Total Tax Cost For Year 1 = [ (3500) + 15600 ] = $ 12100
Total Tax Cost For Year 1 = [ 14000 + 19500 ] = $ 33500
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