Jabar Corporation, a C corporation, projects that it will have taxable income of $315,000 before incurring any lease expenses. Jabar’s tax rate is 35 percent. Abdul, Jabar’s sole shareholder, has a marginal tax rate of 39.6 percent on ordinary income and 20 percent on dividend income. Jabar always distributes all of its after-tax earnings to Abdul.
What is the amount of the overall tax (corporate level + shareholder level) on Jabar Corp.’s $315,000 prelease expense income if Jabar Corp. distributes all of its after-tax earnings to its sole shareholder, Abdul (include the 3.8% net investment income tax on dividend and rental income.)?
What is the amount of the overall tax on Jabar Corp.’s $315,000 prelease expense income if Jabar leases equipment from Abdul at a cost of $28,800 for the year (include the net investment income tax on dividend and rental income.)
What is the amount of the overall tax on Jabar Corp.’s $315,000 prelease expense income if Jabar Corp. leases equipment from Abdul at a cost of $28,800 for the year but the IRS determines that the fair market value of the lease payments is $23,500 (include the net investment income tax on dividend and rental income.)?
Answer:
| a. No Lease Payment | b. $30,000 Lease Deduction | c. $25,000 Lease Deduction | Description | |
| (1) Taxable incomebefore lease payment | $315,000 | $315,000 | $315,000 | |
| (2) Lease payment | 0 | 28,800 | 23,500 | |
| (3) Taxable income | $315,000 | $286,200 | $291,500 | (1) – (2) |
| (4) Entity tax | 110,250 | 100,170 | 102,025 | (3) ´35% |
| (5) After-tax entity earnings | $204,750 | $186,030 | $189,475 | (3) – (4) |
| (6) Abdul’s tax on dividends | $48,731 | $44,275 | $45,095 | (5) ´(20% + 3.8%) |
| (7) Abdul’s tax on lease payment | 0 | $12,499 | $10,199 | (2) ´(39.6% + 3.8%) |
| Overall tax | $158,981 | $156,944 | $157,319 | (4)+(6)+(7) |
