Question

Akram owns an S corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income available to offset these losses totaling $80,000. Assuming Akram's marginal tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on his income assuming there are no other loss limitations

Answer 1

The answer is:

$39,200

Step-by-step explanation:

First we have to calculate Akram's net income as follows:

ordinary income = $80,000

losses = $10,000

Net income = 80,000 - 10,000 = $70,000.

Next let us compute the total tax rate by finding the sum of the separate tax rates:

marginal tax rate = 35% , corporate tax rate = 21%

∴ Total tax = 35 + 21 = 56%

Therefore, the total tax on income = 56% of 70,000

= 56/100 × 70,000 = 0.56 × 70,000 = $39,200