Sales for L. B. Menielle Inc. during the past year amounted to $5.19 million. The firm provides...

Question:

Sales for L. B. Menielle Inc. during the past year amounted to $5.19 million. The firm provides parts and supplies for oil field service companies. Gross profits for the year were $3.13 million. Operating expenses totaled $ 1.07 million. The interest income from the securities owned was $18000 The firm's interest expense was $101000. Calculate the corporation's tax liability by using the following corporate tax rate structure ;

Corporate Tax Rates
15% $0-$50,000
25% $50,001-$75,000
34% $75,001-$10,000,000
35% Over-$10,000,000

Additional surtax:

i. 5% on income between $100,000 and$335,000

ii. 3% on income between $15,000,000 and $18,333,333

A Tiered Tax System Imposes Differing Marginal Tax Rates on Different Levels of Income

While the income statement displays tax liability as a single expense line item, the factors that determine this tax liability are often varied and complex. Tier tax systems that impost differing tax rates on different levels of income (the rates typically increase with income) make the marginal tax rate on higher income much higher, increasing the overall observed (effective) tax rate.

Answer and Explanation:

The firm's tax liability is $672,680. This gives an effective tax rate of 34.03%.

SOLUTION DETAIL

The first step is to calculate the firm's taxable income. These calculations are shown below:

Gross Profit $3,130,000
Operating Expense $(1,070,000)
Operating Profit $2,060,000
Interest Income $18,000
Interest Expense $(101,000)
Taxable Income $1,977,000

The tax calculations are based on the tiers provided. Given that the firm shows $1.977 million in taxable income, it will be taxed through the first three tiers, but avoid taxation at the highest tier, which starts at $10 million in taxable income. It will also incur the tax surcharge on the lower income tier, but not be liable for the upper tier surcharge.

Statutory Taxes Rate Marginal Tax Cumulative Tax Liability
First $50,000 15% $7,500 $7,500
Next $75,000 25% $18,750 $26,250
Remaining $1,852,000 34% $629,680 $655,930

The firm also incurs a 5% surcharge on income up $333,500, or $16,750 ($335,000 X 0.05 = $16,750). This brings the total tax liability to $672,680, or 34.03% of taxable income.


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