Mrs. Fuente, who has a 35% 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: Compute Mrs. Fuente's tax on her income from Furey.

Question

Mrs. Fuente, who has a 35% 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:  Compute Mrs. Fuente's tax on her income from Furey.

Quizplus · Accepted Answer

Mrs. Fuente's taxable income from Furey can be calculated as follows:

(Sales revenue - Cost of goods sold - Operating expenses - Interest paid to Mrs. Fuente) = Furey's taxable income

($8,500,000 - $5,300,000 - $1,600,000 - $0) = $2,600,000

Since Mrs. Fuente is the sole shareholder of Furey Inc, the corporation's taxable income is also her taxable income. Therefore, Mrs. Fuente's total taxable income for the year is:

(Ordinary income + Interest income from Furey) = Total taxable income

($915,000 + $60,000) = $975,000

Mrs. Fuente's tax on her income from Furey would be:

($975,000 * 35%) - ($1,000,000 * 5%) = $322,500 - $50,000 = $272,500

Therefore, choice C is the correct answer.

Mrs Fuente, Who Has a 35% Marginal Tax Rate on Ordinary