388 INCOME TAXES12-3 Bill Jackson worked during school and during the first
2 months of pis summer vacation. After factoring in
his deductions and personal exemption as a single
man, Bill found that he had a total taxable income
of $1800. Bill's employer wants him to work another
month during the summer, but Bill had planned to
spend the month hiking. If an additional month's work
would increase Bill's taxable income by $1600, how
much more money would he have after paying the
income tax? (Answer: $1440)
12-4 A married couple filing jointly have a combined total
adjusted gross income of $75,000. They have com-
puted that their allowable itemized deductions are
$4000. Compute their federal income tax.
(Answer:$10,162.50).
12-5 Jane Shay operates a management consulting busi-
ness. The business has been successful and now pro-
duces a taxable income of $65,000 per year after all
"ordinary and necessary" expenses and depreciation
have been deducted. At present the business is oper-
ated as a proprietorship; that is, Jane pays personal
federal income tax on the entire $65,000. For tax pur-
poses, it is as if she had ajob that pays her a $65,000
salary per year.
As an alternative, Jane is considering incorpo-
rating the business. If she does, she will pay her-
self a salary of $22,000 a year from the corporation.
The corporation will then pay taxes on the remain-
ing $43,000 and retain the balance of the money as
a corporate asset. Thus Jane's two alternatives are to
operate the business as a proprietorship or as a cor-
poration. Jane is single and has $2500 of itemized
personal deductions. Which alternative will result in
a smaller total payment of taxes to the government?
(Answer:Incorporation, $8280 versus $11,736)12-6 Bill Alexander and his wife Valerie are both em-
ployed. Bill will have an adjusted gross income this
year of $70,000. Valerie has an adjusted gross in-
come of $2000 a month. Bill and Valerie have agreed
that Valerie should continue working only until the
federal income tax on their joint income tax return
becomes $11,500. On what date should Valerie quit
her job?12-7 A company wants to set up a new office in a country
where the corporate tax rate is asJollows: 15% of first
$50,000 profits, 25% of next $25,000, 34% of next
$25,000, and 39% of everything over $100,000. Ex-
ecutives estimate that they will have gross revenues of
$500,000, total costs of $300,000, $30,000 in allow-
able tax deductions, and a one time business start-up
credit of $8000. What is taxable income for the first
year and how much should the company expect to pay
in taxes?
12-8 ARKO oil company purchased two large compres-
sors for $125,000 each. One compressor was installed
in the firm's Texas refinery and is being depreciated
by MACRS depreciation. The other compressor was
placed in the Oklahoma refinery, where it is being de-.
preciated by sum-of-years' -digits depreciation with
zero salvage value. Assume the company pays fed-
eral income taxes each year and the tax rate is Con-
stant. The corporate accounting department noted that
the two compressors are being depreciated differently
and wonders whether the corporation will wind up
paying more income taxes over the life of the equip-
ment as a result of this. What do you tell them?
12-9 Sole Brother Inc. is a shoe outlet to a major shoe man-
ufacturing industry located in Chicago. Sole Brother
uses accounts payable as one of its financing sources.
Shoes are delivered to Sole Brother with a 3% dis-
count if payment on the invoice is received within
10 days of delivery. By paying after the lO-day pe-
riod, Sole is borrowing money and paying (giving
up) the 3% discount. Although Sole Brother is not re-
quired to pay interest on delayed payments, the shoe
manufacturers require that payments not be delayed
beyond 45 days after the invoice date. To be sure of
paying within 10 days, Sole Brothers decides to pay
on the fifth day. Sole has a marginal corporate income
tax of 40% (combined state and federal). By paying
within the 10-day period, Sole is avoiding paying a
fairly high price to retain the money owed shoe manu-
facturers. What would have been the effective annual
after-tax interest rate?
12-10 To increase its market share, Sole Brother Inc. decided
to borrow $5000 from its banker for the purchase
of newspaper advertising for its shoe retail line. The
loan is to be paid in four equal annual payments with
15% interest. The loan is discounted 6 points. The
6 "points" is an additional interest charge of 6% of the
loan, deducted immediately. This additional interest
6%(5000) =$300 means the actual amount received
from the $5000 loan is $4700. The $300 additional
interest may be deducted as four $75 additional an-
nual interest payments. What is the after-tax interest
rate on this loan?
12-11 A major industrialized state has a state corporate tax
rate of 9.6% of taxable income. If a corporation has----