Engineering Economic Analysis

378 INCOME TAXES

Taxable Income Tax Rate

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Corporate Income Tax

Not over $50,000

$50,000-75,000

$75,000-100,000

$100,000-335,000

$335,000-10 million

$10 million-15 million

$15 million-18,333,333

:::$18,333,333

15%

25%

34%

39%*

34%

35%

38%

35%

15% over $0

$7,500 + 25% over $50,000

$13,750 + 34% over $75,000

$22,250 + 39% over $100,000

$113,900 + 34% over $335,000

$3,400,000 + 35% over $10 million

$5,159,000 + 38% over $15 million

$6,425,667 + 35% over $18,333,333

*The extra 5% from $100,000 to $335,000 was chosen so that firms in the $335,000

to $10 million bracket pay a flat 34% tax rate. [(0.39-0.34)](335,000-100,000) =

(0.34 - 0.15)(50,000) + (0.34 - 0.25)(75,000 - 50,000)] so tax= 0.34 (tax

income) ~n $335,000 to $10 million bracket. Similarly, for corporate incomes over

$18,333,333 the tax rate schedule is equivalent to a flat tax rate of 35%.

The French Chemical Corporationwas fOnnedto produce household bleach. The firmbought land ,

for $220,000, had a $900,000 factory building erected, and installed $650,000 worth of chemical

and packaging equipment. The plant was completed and operations begun on April 1. The gross

income for the calendar year was $450,000. Supplies and all operating expenses, excluding the

capital expenditures,were $100,000. The firm will use modifiedacceleratedcost recovery system

(MACRS) depreciation.

(a) What is the first-year depreciation charge?

(b) Whatis the first-year taxableincome?

(c) How much will the corporationpay in federal.income taxes for the year?

lSO'LUTION

(a) MACRS depreciation: Chemical eqt1ipm~ntigpersonal propeIty:I3romTable 11-2, iUs

probably in the "7-year, all other property" class.

I3irst-yeardepreciation(equipment) .,,$650,000x 14.29% -<$92,885

The building is in the 39-yearreal propertyclass.Sm(;e it was placed in serVjceon April 1,

the.first-year depreciationis:

First-year depre(;iatioIl(buildiIlg)... ...$90Q,000x 1.819%' ..$16,37,1 (see Tablet 1-4)

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