c. What is the amount of the overall tax on Jabar Corp.’s $300,000 pre-lease expense income if Jabar Corp. leases equipment from Abdul at a cost of $30,000 for the year but the IRS determines that the fair market value of the lease payments is $25,000 (include Medicare Contribution tax on rental income)? Answer: $30,000 c. $25,000 Description Payment Lease Lease Deduction Deduction (1) Taxable income $ 300,000 $ 300,000 $300,000 before lease payment (2) payment 0 30,000 25,000 (3) Taxable income $ 300,000 $ 270,000 $275,000 (1) (2) – (4) Entity tax 105,000 $94,500 $96,250 (3) 35% (5) After-tax entity $195,000 $ 175,500 178,750 (3) (4) – earnings (6) Abdul’s tax on $46,410 $41,769 $42,543 (5) (20% + dividends 3.8%) (7) Abdul’s tax on 0 $13,020 $10,850 (2) (39.6% + lease payment 3.8%) Overall tax $ 151,410 $ 149,289 $ 149,643 (4) + (6) + (7) 62. [LO 3] Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any interest expense. Assume Nutt’s tax rate is 35 percent. a. What is the amount of the overall tax (corporate level + shareholder level) on the $400,000 of pre-interest expense earnings if Hazel, Nutt’s sole shareholder, lends Nutt Corporation $30,000 at the beginning of the year, Nutt pays Hazel $8,000 of interest on the loan (interest is considered to be reasonable), and Nutt distributes all of its after-tax earnings to Hazel? Assume her ordinary marginal rate is 35 percent and dividend tax rate is 15 percent. b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $6,000. What is the amount of the double-tax on Nutt Corporation’s pre-interest expense earnings? Answer: a. Reasonable b. Description interest Unreasonable interest
c. What is the amount of the overall tax on Jabar Corp.’s $300,000 pre-lease expense income if Jabar Corp. leases equipment from Abdul at a cost of $30,000 for the year but the IRS determines that the fair market value of the lease payments is $25,000 (include Medicare Contribution tax on rental income)? Answer: Payment $30,000 Lease Deduction c. $25,000 Lease Deduction Description (1) Taxable income before lease payment $ 300,000 $ 300,000 $300,000 (2) payment 0 30,000 25,000 (3) Taxable income $ 300,000 $ 270,000 $275,000 (1) – (2) (4) Entity tax 105,000 $94,500 $96,250 (3) 35% (5) After-tax entity earnings $195,000 $ 175,500 178,750 (3) – (4) (6) Abdul’s tax on dividends $46,410 $41,769 $42,543 (5) (20% + 3.8%) (7) Abdul’s tax on lease payment 0 $13,020 $10,850 (2) (39.6% + 3.8%) Overall tax $ 151,410 $ 149,289 $ 149,643 (4) + (6) + (7) 62. [LO 3] Nutt Corporation projects that it will have taxable income for the year of $400,000 before incurring any interest expense. Assume Nutt’s tax rate is 35 percent. a. What is the amount of the overall tax (corporate level + shareholder level) on the $400,000 of pre-interest expense earnings if Hazel, Nutt’s sole shareholder, lends Nutt Corporation $30,000 at the beginning of the year, Nutt pays Hazel $8,000 of interest on the loan (interest is considered to be reasonable), and Nutt distributes all of its after-tax earnings to Hazel? Assume her ordinary marginal rate is 35 percent and dividend tax rate is 15 percent. b. Assume the same facts as in part a except that the IRS determines that the fair market value of the interest should be $6,000. What is the amount of the double-tax on Nutt Corporation’s pre-interest expense earnings? Answer: a. Reasonable interest b. Unreasonable interest Description
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