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-u-x.x\' A-?.a-?// .tE .ea. el- 1 Normal 1 No Sp ac., Heading i Heading 2 Title Font 5. 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? ENGLISH (UNITED STATES) to search

Solution

Answer-1(a)

Assumption : Tax year = 2018

Calculation of taxable income:

Gross income = $15 million

Less Operating expenses = $10 million

Less Depreciation = $2.6 million

$2.4 million

Add depreciation recaptured = $0.8 million (*$800,000)

Taxable income = $3.2 million

(*Depreciation recaptured will be taxable as ordinary income)

Calculation of corporate federal income tax

Beginning with the 2018 tax year, the TCJA makes the corporate tax rate a flat 21%.

So, Federal corporate income tax = taxable income*21% = 3.2 million*21%= 0.672 million=$672,000

Answer 1(b)

Meaning of average federal tax rate: The total amount of taxes paid by an individual or business divided by taxable income.

Calculation of average federal tax rate:

A. Corporate income tax paid = $672,000

B. Taxable income = $3.2 million =$3,200,000 (*1 million =1,000,000)

C . Average federal tax rate = A/B= 21%

NOTE: Prior to the year 2018, C corporations were subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Because of this graduated tax rates, average federal tax rate holds some importance. However after the tax rate has changed to flat 21% , average federal tax rate is always equals the 21%.

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