Deck 12: Income Taxes for Corporations

Question 1

An equipment purchased at a cost $80,000 by a local company is being depreciated using MACRS method as a 5-year property. At the end of four years, the management decided to sell the equipment for a modest price of $20,000. The company is in the 34% tax bracket. Compute the tax consequence on the sale of this equipment.

A) $6,800
B) $926.40
C) $2,100
D) None of these

Answer 1

$2,100

Question 2

Eric Systems located in Georgia expects a 10% after-tax rate of return on equipment investments. The state income tax rate is 6%. If the company is in the 34% federal tax bracket, estimate the before-tax rate of return required.

A) 11.36%
B) 13.80%
C) 16.12%
D) None of these

Answer 2

16.12%

Question 3

Case Study 12
First cost of equipment = $150,000
Market value at the end of year 6 = $30,000
MACRS depreciation is used. The equipment is a 5-year property.
Incremental income-tax rate for the company = 35%
$$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { BT-CF in } \$ & - 150 \mathrm {~K} & 60 \mathrm {~K} & 63 \mathrm {~K} & 66 \mathrm {~K} & 69 \mathrm {~K} & 72 \mathrm {~K} & 75 \mathrm {~K} \\\hline \begin{array} { l } \text { ORM } \\\text { Expenses }\end{array} & & 10 \mathrm {~K} & 13 \mathrm {~K} & 16 \mathrm {~K} & 19 \mathrm {~K} & 22 \mathrm {~K} & 25 \mathrm {~K} \\\hline\end{array}$$

-The first-year after tax-cash flow is _____________.

A) $33,000
B) $27,000
C) $53,000
D) $40,000

Answer 3

$53,000

Question 4

Case Study 12
First cost of equipment = $150,000
Market value at the end of year 6 = $30,000
MACRS depreciation is used. The equipment is a 5-year property.
Incremental income-tax rate for the company = 35%
$$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { BT-CF in } \$ & - 150 \mathrm {~K} & 60 \mathrm {~K} & 63 \mathrm {~K} & 66 \mathrm {~K} & 69 \mathrm {~K} & 72 \mathrm {~K} & 75 \mathrm {~K} \\\hline \begin{array} { l } \text { ORM } \\\text { Expenses }\end{array} & & 10 \mathrm {~K} & 13 \mathrm {~K} & 16 \mathrm {~K} & 19 \mathrm {~K} & 22 \mathrm {~K} & 25 \mathrm {~K} \\\hline\end{array}$$

-The fourth -year taxable income is equal to ________________.

A) $500
B) $32,750
C) $50,000
D) $51,720

Question 5

Case Study 12
First cost of equipment = $150,000
Market value at the end of year 6 = $30,000
MACRS depreciation is used. The equipment is a 5-year property.
Incremental income-tax rate for the company = 35%
$$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Year } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { BT-CF in } \$ & - 150 \mathrm {~K} & 60 \mathrm {~K} & 63 \mathrm {~K} & 66 \mathrm {~K} & 69 \mathrm {~K} & 72 \mathrm {~K} & 75 \mathrm {~K} \\\hline \begin{array} { l } \text { ORM } \\\text { Expenses }\end{array} & & 10 \mathrm {~K} & 13 \mathrm {~K} & 16 \mathrm {~K} & 19 \mathrm {~K} & 22 \mathrm {~K} & 25 \mathrm {~K} \\\hline\end{array}$$

-The tax on depreciation recapture in year 6 is equal to __________________.

A) $6,000
B) $3,000
C) $10,500
D) $10,000

Question 6

A distribution center purchased an equipment for $100,000 and has depreciated the equipment using the MACRS depreciation schedule as a 7-year property. The operating income in year 2 was $200,000 and the expenses were $87,000. If the company is in the 40% income tax bracket, determine the after-tax cash flow in year 2
The tax on depreciation recapture in year 2 is equal to __________________.

A) $40,00
B) $35,404
C) $24,490
D) None of these

Question 7

For a company with a taxable income of $10.5M, determine the:

A) marginal
B) average tax rates

Question 8

A production equipment at a cost of $500,000 has been purchased by a contract manufacturing company to meet the specific needs of customer that had awarded a 4-year contract with the possibility of extending the contract for another 4 years. The company plans to use the MACRS depreciation method for this equipment as a 7-year property for tax purposes. The income tax rate for the company is 39%, and it expects to have an after -tax rate of return of 12% for all its investments.
The equipment generated an annual income of $100,000 for the first four years. The customer decided not to renew the contract after 4 years. Consequently, the company decided to sell the equipment for $180,000 at the end of 4 years. Determine if the company obtained the expected after-tax rate of return on this investment.

Question 9

The income tax rates are the same for capital gains and depreciation recapture of an asset.

Question 10

A small business sold an equipment for $100,000 after depreciating the equipment using SOYD depreciation method. The federal tax liability on this depreciation recapture is $34,000 if the company also had other taxable income of $150,000 in that year.

Question 11

A firm operates in a state that has a corporate income tax rate of 5% and is deductible from the federal taxes. If the incremental federal tax is 34%, then the combined effective tax rate is 35.9%

Question 12

Johnson's Inc. made $250,000 in 2015 in consulting business in Tennessee. The company had other taxable income of $1,000,000 in year 2015. The federal income tax for the consulting work done in Tennessee is $85,500

Question 13

A piece of property bought by XYZ Corporation a few years ago was sold for $5 M. The cost basis for this property was $2.75 M. The company had a taxable income of $12.15 million in the year the property was sold.
The capital gain tax on this property is $337,500.