Pratt Company structured an income-generating transaction so that the $750,000 income and cash flow shifted to Pratt's wholly owned subsidiary,PTB Company.If Pratt's marginal tax rate is 40%,and PTB's tax rate is 15%,compute the tax savings from the income shift.

Question

Quizplus · Accepted Answer

If Pratt had earned the $750,000 directly, they would have paid $300,000 in taxes (40% x $750,000). By shifting the income to PTB, the tax liability is reduced to $112,500 (15% x $750,000). Therefore, the tax savings from the income shift is $187,500 ($300,000 - $112,500). Option C is the closest to this value.

Pratt Company Structured an Income-Generating Transaction So That the $750,000