Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary, PTB Company. If Pratt's marginal tax rate is 21%, and PTB's tax rate is 10%, compute the tax savings from the income shift.

Question

Quizplus · Accepted Answer

The tax savings from the income shift can be calculated by comparing the tax Pratt would have paid without the shift to the tax paid by PTB with the shift. Without the shift, Pratt would pay 21% of $750,000, which is $157,500. With the shift, PTB pays 10% of $750,000, which is $75,000. The savings are $157,500 - $75,000 = $82,500.

Pratt Company Structured an Income-Generating Transaction So That the $750,000