Question
In: Accounting
Jabar Corporation, a C corporation, projects that it will have taxable income of $250,000 before incurring...
Jabar Corporation, a C corporation, projects that it will have taxable income of $250,000 before incurring any lease expenses. Jabar’s tax rate is 35 percent. Abdul, Jabar’s sole shareholder, has a marginal tax rate of 39.6 percent on ordinary income and 20 percent on dividend income. Jabar always distributes all of its after-tax earnings to Abdul.
a. What is the amount of the overall tax (corporate level + shareholder level) on Jabar Corp.’s $250,000 prelease expense income if Jabar Corp. distributes all of its after-tax earnings to its sole shareholder, Abdul (include the 3.8% net investment income tax on dividend and rental income.)?
| b. |
What is the amount of the overall tax on Jabar Corp.’s $250,000 prelease expense income if Jabar leases equipment from Abdul at a cost of $24,600 for the year (include the net investment income tax on dividend and rental income.)?
|
Solutions
Expert Solution
| Solution: | ||||
| Part- (a) Computation of overall tax | ||||
| Abdul | Description | Jabar Corp. | Description | |
| (1) Taxable income | $ 250,000.00 | |||
| (2) Entity level tax | $ 87,500.00 | (1) x 35% | ||
| (3) After tax entity Earnings | $ 162,500.00 | (1) - (2) | ||
| (4) Owner tax | ||||
| Ordinary tax | ||||
| Dividend tax | $ 32,500.00 | (3) x 20% | ||
| Net investment income tax | $ 6,175.00 | (3) x 3.8% | ||
| Self employment tax | ||||
| Medicare tax | ||||
| Total owner tax | $ 38,675.00 | |||
| Overall Tax | $ 126,175.00 | (2) + (4) | ||
| Part- (b) Computation of overall tax | ||||
| Abdul | Description | Jabar Corp. | Description | |
| (1) Prelease expenses income | $ 250,000.00 | |||
| (2) Lease rental expenses | $ 24,600.00 | |||
| (3) Lease rental income | $ 24,600.00 | |||
| (4) Taxable income | $ 24,600.00 | (3) above | $ 225,400.00 | (1) - (2) |
| (5) Entity level tax | $ 78,890.00 | (4) x 35% | ||
| (6) After tax entity Earnings | $ 24,600.00 | (4) - (5) | $ 146,510.00 | (4) - (5) |
| (7) Owner tax | ||||
| Ordinary tax | $ 9,741.60 | (6) x 39.6% | ||
| Dividend tax | $ 29,302.00 | (6) x 20% | ||
| Net investment income tax | $ 934.80 | (6) x 3.8% | $ 5,567.38 | (6) x 3.8% |
| Total owner tax | $ 10,676.40 | $ 34,869.38 | ||
| Overall Tax | $ 10,676.40 | (3) above | $ 113,759.38 | (5) + (7) |
| Gross overall Tax | $ 124,435.78 | (Overall Abdul + Jabar Corp. | ||
| Part- (c ) Computation of overall tax | ||||
| Abdul | Description | Jabar Corp. | Description | |
| (1) Prelease expenses income | $ 250,000.00 | |||
| (2) Lease rental expenses | $ 17,500.00 | |||
| (3) Lease rental income | $ 24,600.00 | |||
| (4) Taxable income | $ 24,600.00 | (3) above | $ 232,500.00 | (1) - (2) |
| (5) Entity level tax | $ 81,375.00 | (4) x 35% | ||
| (6) After tax entity Earnings | $ 24,600.00 | (4) - (5) | $ 151,125.00 | (4) - (5) |
| (7) Owner tax | ||||
| Ordinary tax | $ 9,741.60 | (6) x 39.6% | ||
| Dividend tax | $ 30,225.00 | (6) x 20% | ||
| Net investment income tax | $ 934.80 | (6) x 3.8% | $ 5,742.75 | (6) x 3.8% |
| Total owner tax | $ 10,676.40 | $ 35,967.75 | ||
| Overall Tax | $ 10,676.40 | (3) above | $ 117,342.75 | (5) + (7) |
| Gross overall Tax | $ 128,019.15 | (Overall Abdul + Jabar Corp. | ||
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