2. Van-Line Company, a small electronics repair firm, expects an annual income o

Question

2. Van-Line Company, a small electronics repair firm, expects an annual income of $70,000 from its regular business. The company is considering expanding its repair business to include personal computers. The expansion would bring in an additional annual income of $30,000, but will require an additional expense of $10,000 each year over the next three years. Using applicable current tax rates, answer the following: (a) What is the marginal tax rate in tax year 1? (b) What is the average tax rate in tax year 1?

Explanation / Answer

Answer

Company Current Income = $70,000

Income from Expansion = 20,000 (30,000 – 10,000)

Total Income = 90,000 (70,000 + 20,000)

Tax = $13,750 + 34% on above 75,000

= $13,750 + 34% * 15,000 (90,000 – 75,000)

Tax = $18,850

1.

Marginal tax rate = 34%, As we know that there is slab rate system so Company 1st year income under 34% Slab.

2.

Average tax rate = Tax / total income

= 18,850 / 90,000

Average tax rate = 20.94%

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