A corporation has $7 mil. in equity. During the tax year it takes in $4 million in receipts and earns $ 2 million in capital gains from sale of subsidiary. It incurs labor costs of $1 million, interest costs of $250,000, material costs of $500,000, and pays rent for structure of $250,000.
Calculate the corporation's total accounting profit and assuming that the profit is fully taxable, calculate its tax liability using the tax rates in this table:
Taxable income ATR at begin. of bracket MTR
less than 50,000 0% 15%
more than 50,000 but less than 75,00 15% 25%
more than 75,000 but less than 10 million 18% 34%
more than 10 mil. 34% 35%
Calculate the ATR (annual tax rate) of the corporation as a percentage of its economic profit, assuming that the opportunity cost of capital is 8%.
To calculate the corporation's total accounting profit, we need to subtract the costs from the receipts and gains:
Total costs = labor costs + interest costs + material costs + rent
= $1,000,000 + $250,000 + $500,000 + $250,000
= $2,000,000
Total accounting profit = receipts + capital gains - total costs
= $4,000,000 + $2,000,000 - $2,000,000
= $4,000,000
Next, we need to determine the corporation's taxable income. To do this, we subtract the equity from the accounting profit:
Taxable income = accounting profit - equity
= $4,000,000 - $7,000,000
= -$3,000,000
The taxable income is negative, which means the corporation has a tax loss. In this case, it won't have any tax liability.
Now, let's calculate the ATR (annual tax rate) of the corporation as a percentage of its economic profit. The economic profit is the accounting profit minus the opportunity cost of capital. Assuming the opportunity cost of capital is 8%, we can calculate it as follows:
Economic profit = accounting profit - (opportunity cost of capital * equity)
= $4,000,000 - (0.08 * $7,000,000)
= $4,000,000 - $560,000
= $3,440,000
To calculate the ATR, we need to determine which tax bracket the taxable income falls into. Since the taxable income is negative, it falls into the "less than 50,000" bracket, with an ATR of 0%.
Therefore, the ATR of the corporation as a percentage of its economic profit is 0%.
To calculate the corporation's total accounting profit, we need to subtract the expenses from the receipts and capital gains:
Total receipts = $4 million
Capital gains = $2 million
Labor costs = $1 million
Interest costs = $250,000
Material costs = $500,000
Rent = $250,000
Total expenses = $1 million + $250,000 + $500,000 + $250,000 = $2 million
Total accounting profit = Total receipts + Capital gains - Total expenses
= $4 million + $2 million - $2 million
= $4 million
To calculate the corporation's tax liability, we need to determine its taxable income and use the tax rates provided:
Taxable income = Total accounting profit = $4 million
Based on the tax table:
For taxable income less than $50,000, the tax rate is 0%.
For taxable income more than $50,000 but less than $75,000, the tax rate is 15%.
For taxable income more than $75,000 but less than $10 million, the tax rate is 18%.
For taxable income more than $10 million, the tax rate is 34%.
Since the taxable income ($4 million) is less than $10 million but more than $75,000, the tax rate is 18%.
Tax liability = Taxable income * Tax rate
= $4 million * 18%
= $720,000
The corporation's tax liability is $720,000.
To calculate the ATR (annual tax rate) of the corporation as a percentage of its economic profit, we need to calculate the economic profit first:
Economic profit = Total accounting profit - Opportunity cost of capital
= $4 million - (8% of $7 million)
= $4 million - $560,000
= $3,440,000
ATR = Tax liability / Economic profit * 100
= $720,000 / $3,440,000 * 100
= 20.93%
The ATR of the corporation is 20.93% of its economic profit.