Corporate Taxes The AOK Corporation had a 2008 taxable income of $2,200,000 from operations after all operating costs but before (1) interest charges of $90,000,
(2) dividends received of $750,000,
(3) dividends paid of $80,000, and
(4) income taxes.
Using the tax schedule in Table 2.3, what is AOK's income tax liability?
What are AOK's average and marginal tax rates on taxable income from operations?

Question

Quizplus · Accepted Answer

First, we need to calculate AOK's taxable income after deductions:
$2,200,000 (taxable income from operations)
- $90,000 (interest charges)
+ $750,000 (dividends received, excluded from taxable income)
- $80,000 (dividends paid, not deductible)
= $2,780,000 (taxable income after deductions)

Using the tax schedule in Table 2.3, AOK's income tax liability is:
$22,250 (10% of $50,000)
+ $49,750 (15% of $331,000)
+ $126,900 (25% of $507,000)
+ $419,000 (34% of $1,232,000)
+ $175,000 (39% of $448,000)
= $793,900

AOK's average tax rate is:
$793,900 ÷ $2,780,000 = 28.6%
AOK's marginal tax rate is 34%, which is the rate on the next dollar of taxable income.

Corporate Taxes the AOK Corporation Had a 2008 Taxable Income