1 For a particular year a company has gross annual income of

1. For a particular year, a company has gross annual income of $780,000, annual expenses of $270,000, and allowed depreciation of $60,000. The company is located in a state where the first $200,000 corporate income is tax-free, and any income above that is taxed at a flat rate of 5%.

a. What is the net cash flow after taxes for the year?

a. What is the company’s federal tax rate?

b. What is the company’s combined (state and federal) tax rate?

c. What is the company’s average state tax rate?

Solution

Gross Annual income                     $7,80,000

Less: Annual Expenses              $(2,70,000)

Add:Deprecition allowed                  $60,000            

Less:State Tax payable/paid        $(15,500)

Net cash flow                                    $5,54,500

Taxable profit = $780000-$270000 = $510000

Company’s Federal Tax = $1,13,900 (tax base)+34% of $(5,10,000-3,35,000)

                                                                = $1,73,400

Comined taxes = $1,73,400+$15,500

                                =$1,88,900