If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax,the after-tax cost of the state tax is $13,000.

Question

Quizplus · Accepted Answer

The after-tax cost of the state tax is calculated by subtracting the amount of tax paid from the corporation's taxable income, which reduces the amount of federal income tax owed.

In this case, the state income tax paid was $20,000. Since the corporation has a 35% marginal federal income tax rate, this reduces the amount of federal income tax owed by $7,000 (35% of $20,000). Therefore, the after-tax cost of the state tax is $13,000 ($20,000 - $7,000).

If a Corporation with a 35% Marginal Federal Income Tax