High-Tech Pumps has a gross income in 1 year of $15 million. Operating expenses

Question

High-Tech Pumps has a gross income in 1 year of $15 million. Operating expenses (salaries and wages, materials, etc.) are $10 million. Depreciation is $2.6 million. Also, this year there is a depreciation recapture of $800,000 because a specialized CNC machine tool that is no longer needed is sold for more than its book value. (a) Compute the company’s federal income taxes. (b) What is the average federal tax rate? High-Tech Pumps has a gross income in 1 year of $15 million. Operating expenses (salaries and wages, materials, etc.) are $10 million. Depreciation is $2.6 million. Also, this year there is a depreciation recapture of $800,000 because a specialized CNC machine tool that is no longer needed is sold for more than its book value. (a) Compute the company’s federal income taxes. (b) What is the average federal tax rate? High-Tech Pumps has a gross income in 1 year of $15 million. Operating expenses (salaries and wages, materials, etc.) are $10 million. Depreciation is $2.6 million. Also, this year there is a depreciation recapture of $800,000 because a specialized CNC machine tool that is no longer needed is sold for more than its book value. (a) Compute the company’s federal income taxes. (b) What is the average federal tax rate?

Explanation / Answer

Taxable income (TI) = gross income - operating expenses - depreciation + depreciation recapture

TI = 15 - 10 - 2.6 + 0.8 = $3.2 million

Taxes = (TI range)(marginal rate)

= (50,000)(0.15) + (25,000)(0.25) + (25,000)(0.34) + (235,000)(0.39) + (3.2M - 0.335M)(0.34)

= 7,500 + 6,250 + 8,500 + 91,650 + 974,100 = $1,088,000

b). Average federal tax rate = $1,088,000/$3,200,000 = 0.34

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