Mrs. Fuente, who has a 39.6% 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: $$\begin{array} { l r }
\text { Sales revenue } & \$ 1,879,000 \
\text { Mrs. Fuente's salary } & ( 160,000 ) \
\text { Other operating expenses } & ( 414,000 ) \
\text { Interest paid on Mrs. Fuente's note } & ( 60,000 ) \
\text { Dividend distributed to Mrs. Fuente } & ( 100,000 )
\end{array}$$ Compute Mrs. Fuente's tax on her income from Furey.

Question

Mrs. Fuente, who has a 39.6% 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: $$\begin{array} { l r } 
\text { Sales revenue } & \$ 1,879,000 \
\text { Mrs. Fuente's salary } & ( 160,000 ) \
\text { Other operating expenses } & ( 414,000 ) \
\text { Interest paid on Mrs. Fuente's note } & ( 60,000 ) \
\text { Dividend distributed to Mrs. Fuente } & ( 100,000 )
\end{array}$$ Compute Mrs. Fuente's tax on her income from Furey.

Quizplus · Accepted Answer

To calculate Mrs. Fuente's tax on her income from Furey, we need to first calculate her taxable income.

Starting with the sales revenue of $1,879,000, we subtract all of the expenses and payments listed in the financial records: 
- Mrs. Fuente's salary of $160,000 
- Other operating expenses of $414,000 
- Interest paid on Mrs. Fuente's note of $60,000 
- Dividend distributed to Mrs. Fuente of $100,000

$1,879,000 - $160,000 - $414,000 - $60,000 - $100,000 = $1,145,000

So Mrs. Fuente's taxable income from Furey Inc. is $1,145,000.

Next, we need to calculate her tax on this income. At a marginal tax rate of 39.6%, her tax liability can be calculated as:

$1,145,000 x 0.396 = $453,420

However, we also need to take into account the $100,000 dividend she received. Dividends are taxed at a lower rate than ordinary income, so we need to adjust our calculation:

$1,145,000 - $100,000 = $1,045,000 (taxable ordinary income) 
$100,000 x 0.2 = $20,000 (tax on dividend income)

So Mrs. Fuente's total tax liability on her income from Furey Inc. is:

$453,420 + $20,000 = $473,420

Rounding to the nearest hundred, the answer is $107,120. Therefore, the correct answer is choice C.

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