Mrs. Fuente, who has a 37% marginal tax rate on ordinary income, is the sole shareholder and CEO of Furey Inc. She also holds a $1 million interest-bearing note issued by Furey. The corporation's current-year financial records show the following: $\begin{array}{llr}
\text {Sales revenue } &\$1,879,000\
\text { Mrs. Fuente's salary} &(160,000)\
\text { Other operating expenses} &(414,000)&\
\text { Interest paid on Mrs. Fuente's note} &(60,000)\
\text { Dividend distributed to Mrs. Fuente } &(100,000)\
\end{array}$
Compute Mrs. Fuente's tax on her income from Furey. (Ignore payroll taxes in your calculations.)

Question

Mrs. Fuente, who has a 37% marginal tax rate on ordinary income, is the sole shareholder and CEO of Furey Inc. She also holds a $1 million interest-bearing note issued by Furey. The corporation's current-year financial records show the following: $\begin{array}{llr}
  \text {Sales revenue  } &\$1,879,000\
 \text {  Mrs. Fuente's salary} &(160,000)\
 \text {  Other operating expenses} &(414,000)&\
 \text {  Interest paid on Mrs. Fuente's note} &(60,000)\
 \text { Dividend distributed to Mrs. Fuente } &(100,000)\
\end{array}$
 Compute Mrs. Fuente's tax on her income from Furey. (Ignore payroll taxes in your calculations.)

Quizplus · Accepted Answer

First, we need to compute Mrs. Fuente's income from Furey:

Dividends received: $400,000 x 70% = $280,000
Interest income: $60,000
Total income: $340,000

Next, we need to determine the tax on Mrs. Fuente's income from Furey:

Dividend income: $280,000 x 20% = $56,000
Interest income: $60,000 x 37% = $22,200
Total tax: $78,200

However, Mrs. Fuente also has to pay tax on the interest income from the note issued by Furey:

Interest income: $40,000 x 37% = $14,800

Therefore, Mrs. Fuente's total tax is $78,200 + $14,800 = $93,000. However, she also gets a credit for the tax paid by Furey on her behalf on the dividends she received:

Tax paid by Furey: $400,000 x 30% = $120,000
Credit: $120,000 x 20% = $24,000

So the final tax on Mrs. Fuente's income from Furey is $93,000 - $24,000 = $69,000

Adding this to her tax on ordinary income of $32,400 (37% x ($90,000 - $18,200)), her total tax is $101,400 (Option C).

Mrs Fuente, Who Has a 37% Marginal Tax Rate on Ordinary