The Dakota Corporation had a 2015 taxable income of $31,500,000 from operations

Question

The Dakota Corporation had a 2015 taxable income of $31,500,000 from operations after all operating costs but before (1) interest charges of $8,400,000; (2) dividends received of $740,000; (3) dividends paid of $5,200,000; and (4) income taxes. a. Use the tax schedule in Table 2.3 to calculate Dakota’s income tax liability. (Round your answer to the nearest dollar amount.)

Income tax liability $

Suppose that in addition to $16.85 million of taxable income, Texas Taco, Inc., received $9,200,000 of interest on state-issued bonds and $820,000 of dividends on common stock it owns in Arizona Taco, Inc.

Use the tax schedule in Table 2.3 to calculate Texas Taco’s income tax liability. (Enter your answer in dollars not in millions.)

What are Texas Taco’s average and marginal tax rates on taxable income? (Round your answers to 2 decimal places.)

Suppose that in addition to $16.85 million of taxable income, Texas Taco, Inc., received $9,200,000 of interest on state-issued bonds and $820,000 of dividends on common stock it owns in Arizona Taco, Inc.

Explanation / Answer

Interest on state issued bonds is not taxable income and should not be included in taxable income. Further more the first 70% of dividend received is not taxable. Only 30% of dividend received are taxed.

1.

a.

Taxable income=31,500,000-8,400,000+(.3×740,000)=$23,322,000

Tax liability=$6,416,667+(23,322,000-18,333,333)×.35=$8162,700.45

2.

a

Taxable income=16,850,000+(.3×820,000)

=$17,096,000

Tax liability=5,150,000+(17096000-15000,001)×.38

=$5,946,479.62

b

Average tax rate=5,946479.62/17096000

=.3478 or 34.78%

Marginal tax rate is 38% as if Corporation earn $1 more of taxable income it would pay 38 cents more.

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