Peete Corporation is subject to franchise tax in State Z. The tax is imposed at a rate of 2% of the taxpayer's net worth that is apportioned to the state by use of a two factor (sales and property equally weighted) formula. The property factor includes real and tangible personal property, valued at net book value at the end of the taxable year. Eighty percent of Peete's sales are attributable to Z, and $200,000 of the net book value of Peete's tangible personal property is located in Z.
Determine the Z franchise tax payable by Peete this year, given the following end-of-the year balance sheet.

Question

Quizplus · Accepted Answer

First, we need to calculate Peete's net worth apportioned to State Z using the two factor formula:
Sales factor = 80%
Property factor = ($200,000 / $600,000) * 50% = 16.67%
Apportionment factor = (80% + 16.67%) / 2 = 48.34%
Net worth apportioned to State Z = $800,000 * 48.34% = $386,720

Next, we can calculate the franchise tax payable:
Franchise tax = $386,720 * 2% = $7,734.40
However, the tax is capped at 0.5% of net worth, which is $4,000. Therefore, the franchise tax payable by Peete is $4,000 for the year.

Peete Corporation Is Subject to Franchise Tax in State Z