Hunt Taxidermy, Incorporated, is concerned about the taxes paid by the company. In addition to $4.4 million of taxable income, the firm received $309,000 of interest on state-issued bonds and $240,000 of dividends on common stock it owns in Oakdale Fashions, Incorporated. (Use corporate tax rate of 21 percent for your calculations.) Calculate Hunt Taxidermy’s tax liability. Note: Enter your answer in dollars not in millions.
Answer (2)
To calculate Hunt Taxidermy’s tax liability, we must consider the taxable income and recognize which portions are taxable and which are not.
Taxable Income : The firm has a taxable income of $4.4 million.
Interest on State-Issued Bonds :
The $309,000 interest received from state-issued bonds is typically tax-exempt under federal tax law. Therefore, it is not included in the calculation of taxable income for federal income tax purposes.
Dividends Received :
Dividends received are generally included in taxable income; however, due to the 'dividends received deduction' (DRD), not all of the $240,000 is taxable. The percentage of deduction depends on the ownership percentage of the corporation paying the dividend.
For simplicity, we will include the full amount unless a specific ownership percentage or deduction amount is provided.
Total Taxable Income Calculation :
Total taxable income for tax purposes: $4,400,000 + $0 (state bond interest) + $240,000 (dividends) = $4,640,000
Corporate Tax Rate and Tax Liability Calculation :
Apply the corporate tax rate of 21% to the total taxable income.
Tax liability = 0.21 \times 4,640,000 = $974,400
Thus, Hunt Taxidermy’s tax liability is $974,400 .
Hunt Taxidermy’s tax liability is calculated to be $974,400 based on a total taxable income of $4.64 million, which includes taxable income and dividends, while state bond interest is exempt from federal taxes. The corporate tax rate of 21% was applied to the taxable income. Therefore, the final tax amount owed by the company is $974,400.
;
