Question 1A [4 points]. Gruber Industries, a subsidiary of The Nakatomi Trading
ID: 2576654 • Letter: Q
Question
Question 1A [4 points]. Gruber Industries, a subsidiary of The Nakatomi Trading Corporation, has reported an annual income of $1,326,000 from their regular business activities. They are considering undertaking a new project which would provide and additional $390,000 in income and cost an additional $156,000 in costs. Gruber Industries and the Nakatomi Corporation are US based businesses and are therefore subject to the current corporate tax rates. If Gruber Industries undertakes this project what is their (a) 12 points] Marginal tax rate for this year? (b) 2 points] Effective tax rate for this year?Explanation / Answer
Existing Income = $1,326,000
New Income = $390,000 - $156,000 = $234,000
Total Income = $1,326,000 + $234,000 = $1,560,000
Marginal Tax rate for this Year
Under this taxpayer’s income are divided into different Slab rates i.e.
Over
But not over
Tax Rate
Of amount over
0
$50,000
15%
$0
50,000
75,000
$7,500 + 25%
50,000
75,000
100,000
13,750 + 34%
75,000
100,000
335,000
22,250 + 39%
100,000
335,000
10,000,000
113,900 + 34%
335,000
10,000,000
15,000,000
3,400,000 + 35%
10,000,000
15,000,000
18,333,333
5,150,000 + 38%
15,000,000
18,333,333
____
35%
0
Tax:
Income is $1,560,000, so Tax will be 113,900 + 34% (on above 335,000)
= $113,900 + (1,225,000 + $34%)
Tax = 530,400
Effective Rate:
Tax = 530,400
Total Income = $1,560,000
Effective rate = (Total Tax / Total Income) * 100
= (530,400 / $1,560,000) * 100
Effective Rate = 34%
Over
But not over
Tax Rate
Of amount over
0
$50,000
15%
$0
50,000
75,000
$7,500 + 25%
50,000
75,000
100,000
13,750 + 34%
75,000
100,000
335,000
22,250 + 39%
100,000
335,000
10,000,000
113,900 + 34%
335,000
10,000,000
15,000,000
3,400,000 + 35%
10,000,000
15,000,000
18,333,333
5,150,000 + 38%
15,000,000
18,333,333
____
35%
0
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