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

Quizplus · Accepted Answer

First we need to calculate Furey's taxable income:

Gross receipts: $1,500,000 
Costs of Goods Sold: ($950,000) 
Gross Profit: $550,000 
Officer's compensation: ($300,000) 
Interest expense: ($80,000) 
Taxable Income: $170,000

Mrs. Fuente's share of the taxable income is $170,000 because she is the sole shareholder.

Next, we need to calculate the interest income from the $1 million note:

Interest income: $1,000,000 x 8% = $80,000

Mrs. Fuente's total income from Furey is $250,000 ($170,000 + $80,000).

Her tax liability on this income is:

Tax on $250,000 at 39.6%: $99,000 
Less: 20% deduction for qualified business income: ($19,880)

Final tax liability: $79,120

Therefore, the correct answer is C) $107,120.

Mrs Fuente, Who Has a 39