32. Inky Inc. reported the following financial information in 2013. Operating income (EBIT) $650,000 Interest $430,000 Dividends from Printers Inc, not included in operating income (Inky owns 3% of Printers) $ 20,000 Dividends paid to Inky's stockholders $50,000 a. What is Inky's tax liability? (Use the corporate tax schedule on page 52.) (Hint: See dividends paid to corporations, page 54.) Dobano b. What is Inky's marginal tax rate? c. What is Inky's average tax rate? briedina od d. Explain why only one of the rates in b and c is relevant for financial decisions. 33. The Snyder Corporation 52 Part 1 Introduction to Financial Management to Financial Management Rate(%) TABLE 2-5 Corporate Income Tax Schedule Income ($) 0-50,000 50,000-75,000 75,000-100,000 100,000-335,000 335,000-10,000,000 10,000,000-15,000,000 15,000,000-18,333,333 Over 18,333,333 54 Parti introduction to Financial Management in turn, creates jobs and economy INSIGHTS Practical Finance The Other Purpose of the Tax System The tax system in the United States has two purposes. The first, of course, is to raise money. But the government also uses the system to incentivize what it considers desirable behavior. Sometimes these desirable ends are economic and sometimes they're social. Here are a few examples. Lower takes on capital gains and dividends make investment more profitable so people buy more stocks. That makes more funds available for business investment, So companies undertake more new projects. That S-type corporations and te small businesses to while enjoying the other ben corporate form. That encou formation of new companies jobs and expands the econ Companies get tax credit employing and training certain killed, difficult to employee Tax credits are available for more spent on restoring and preserving historical buildings net amount retained dividends from To see the point, we have to look beyond net income to the net amount by each firm after paying its investors. That is, we have to subtract dividende income to arrive at the net addition to retained earnings. The comparison folle Firm Financed by Debt Equity EBIT $120 $120 Interest $100 $120 Tax @ 30% 30 Net Income 000 $ 70 $ 84 Dividends Net RE addition $ 64 20 36 $ 70 20 idends paid to another oration are partially exempt. Notice that the firm financed with debt gets to keep S6 more money, about 10% in this case. The difference is in the tax line. The debt financed firm gets to deduct the payment to its investors before calculating taxes, while the equity financed business has to pay tax on an amount that is not reduced by the dividend payment. Dividends Paid to Corporations in Chapter 1, we said that the major financial disadvantage of the corporate form is the double taxation of earnings. Earnings are first taxed as corporate profits and then taxed again as personal income when passed to shareholders in the form of dividends. But what happens if one corporation owns another that in turn is owned by individuals? Under those conditions, we'd expect triple taxation. To see this, consider Figure 2-2 in which corporation B is owned by corporation A, which is owned by individuals. It's easy to see that a dollar earned by B is taxed as income to B, as dividend income to A, and as dividend income to the shareholders. If Bowned corporation C's earnings would be subject to quadruple taxation. Chapter 2 cia Background: A Review of Accounting Financial Statements, and Taxes 53 FIGURE 2.2 Multiple Taxation Corporation B Corporate tax on B Dividend BOA Corporation A Corporate tax on A Dividend: A to shareholders Shareholders Personal Tax bo The government intends double taxation but not triple taxation and beyond. It therefore gives partial relief by exempting most of the dividends paid by one corporation to another from taxation as income to the receiving company The percentage exempted depends on the amount of B's stock owned by A. Ownership Exemption 80% 100% In our illustration, this means that if A owns 30% of B and B pays a dividend of $100 to A, A would declare only $20 as income in preparing its taxes. The remaining $80 would be exempt. Tax Loss Carry Back and Carry Forward Suppose that over a four-year period a business had three good years and one with a substantial loss. If we consider each year individually, its earnings before tax, tax, and net income might be as shown at the top of Figure 2-3. (We are assuming a flat 30% tax rate to make the illustration simple.) At first glance, this looks reasonable. The company pays taxes when it has income and no tax when it has a loss. However, the business owner might very well claim that the IRS is putting him or her out of business if the tax system worked like this. The entrepreneur would point to the total column and claim that over the entire four-year period, the government was trying to make the business pay $90 in tax on $50 of earnings before tax. This would not only be unfair but impossible. Recognizing this problem, the tax system allows businesses to spread the loss in year 3 among the years before and after. In this case, $100 of the year 3 loss would be carried back into each of years 1 and 2, entirely offsetting income in those years. After the loss year, the company would lile amended tax returns for years 1 and 2 and receive refunds of the taxes paid. The remaining $50 of year 3 loss could be carried forward to reduce year 4 EBT. The idea is shown schematically in Figure 2-3. Losses can be carried back for 2 years and forward for as many as 20 years. Business losses can be carried backward or forward in time to offset 32. Inky Inc. reported the following financial information in 2013. Operating income (EBIT) $650,000 Interest $430,000 Dividends from Printers Inc, not included in operating income (Inky owns 3% of Printers) $ 20,000 Dividends paid to Inky's stockholders $50,000 a. What is Inky's tax liability? (Use the corporate tax schedule on page 52.) (Hint: See dividends paid to corporations, page 54.) Dobano b. What is Inky's marginal tax rate? c. What is Inky's average tax rate? briedina od d. Explain why only one of the rates in b and c is relevant for financial decisions. 33. The Snyder Corporation 52 Part 1 Introduction to Financial Management to Financial Management Rate(%) TABLE 2-5 Corporate Income Tax Schedule Income ($) 0-50,000 50,000-75,000 75,000-100,000 100,000-335,000 335,000-10,000,000 10,000,000-15,000,000 15,000,000-18,333,333 Over 18,333,333 54 Parti introduction to Financial Management in turn, creates jobs and economy INSIGHTS Practical Finance The Other Purpose of the Tax System The tax system in the United States has two purposes. The first, of course, is to raise money. But the government also uses the system to incentivize what it considers desirable behavior. Sometimes these desirable ends are economic and sometimes they're social. Here are a few examples. Lower takes on capital gains and dividends make investment more profitable so people buy more stocks. That makes more funds available for business investment, So companies undertake more new projects. That S-type corporations and te small businesses to while enjoying the other ben corporate form. That encou formation of new companies jobs and expands the econ Companies get tax credit employing and training certain killed, difficult to employee Tax credits are available for more spent on restoring and preserving historical buildings net amount retained dividends from To see the point, we have to look beyond net income to the net amount by each firm after paying its investors. That is, we have to subtract dividende income to arrive at the net addition to retained earnings. The comparison folle Firm Financed by Debt Equity EBIT $120 $120 Interest $100 $120 Tax @ 30% 30 Net Income 000 $ 70 $ 84 Dividends Net RE addition $ 64 20 36 $ 70 20 idends paid to another oration are partially exempt. Notice that the firm financed with debt gets to keep S6 more money, about 10% in this case. The difference is in the tax line. The debt financed firm gets to deduct the payment to its investors before calculating taxes, while the equity financed business has to pay tax on an amount that is not reduced by the dividend payment. Dividends Paid to Corporations in Chapter 1, we said that the major financial disadvantage of the corporate form is the double taxation of earnings. Earnings are first taxed as corporate profits and then taxed again as personal income when passed to shareholders in the form of dividends. But what happens if one corporation owns another that in turn is owned by individuals? Under those conditions, we'd expect triple taxation. To see this, consider Figure 2-2 in which corporation B is owned by corporation A, which is owned by individuals. It's easy to see that a dollar earned by B is taxed as income to B, as dividend income to A, and as dividend income to the shareholders. If Bowned corporation C's earnings would be subject to quadruple taxation. Chapter 2 cia Background: A Review of Accounting Financial Statements, and Taxes 53 FIGURE 2.2 Multiple Taxation Corporation B Corporate tax on B Dividend BOA Corporation A Corporate tax on A Dividend: A to shareholders Shareholders Personal Tax bo The government intends double taxation but not triple taxation and beyond. It therefore gives partial relief by exempting most of the dividends paid by one corporation to another from taxation as income to the receiving company The percentage exempted depends on the amount of B's stock owned by A. Ownership Exemption 80% 100% In our illustration, this means that if A owns 30% of B and B pays a dividend of $100 to A, A would declare only $20 as income in preparing its taxes. The remaining $80 would be exempt. Tax Loss Carry Back and Carry Forward Suppose that over a four-year period a business had three good years and one with a substantial loss. If we consider each year individually, its earnings before tax, tax, and net income might be as shown at the top of Figure 2-3. (We are assuming a flat 30% tax rate to make the illustration simple.) At first glance, this looks reasonable. The company pays taxes when it has income and no tax when it has a loss. However, the business owner might very well claim that the IRS is putting him or her out of business if the tax system worked like this. The entrepreneur would point to the total column and claim that over the entire four-year period, the government was trying to make the business pay $90 in tax on $50 of earnings before tax. This would not only be unfair but impossible. Recognizing this problem, the tax system allows businesses to spread the loss in year 3 among the years before and after. In this case, $100 of the year 3 loss would be carried back into each of years 1 and 2, entirely offsetting income in those years. After the loss year, the company would lile amended tax returns for years 1 and 2 and receive refunds of the taxes paid. The remaining $50 of year 3 loss could be carried forward to reduce year 4 EBT. The idea is shown schematically in Figure 2-3. Losses can be carried back for 2 years and forward for as many as 20 years. Business losses can be carried backward or forward in time to offset