5. (Corporate tax liability) Applejack Corporation had earnings from operations of $25 million in 2019. In addition, it received $1 million in interest and $5 mil- lion in dividends from investments. 65% of the divi- dends received may be excluded from its income. It paid interest of $7 million to its creditors and $4 mil- lion in dividends to its stockholders.

a. DetermineApplejacksU.S.federaltaxableincome.

b. Calculate Applejacks tax liability to the

government for 2019.

c. What is Applejacks average tax rate?

d. What is Applejacks marginal tax rate?

Done Attachment was taken by taxes on income. This implies an effective tax rate of $3.996,000/$10,000,000 = 39.96% Answer: Double taxation effectively subjects the firm and its shareholders to a 39.96% tax rate Some business firms retain most of their earnings, or do not pay dividends at all. Indeed, many firms have legitimate business needs that require substantial fund- ing, including that from retained earnings. However, the tax authorities can assess a substantial penalty against a firm if they believe the firm is retaining earnings improper accumulation for the purpose of avoiding double taxation. This is known as the improper ac tax term referring to the "excessive retention of cumulation of retained earnings. Small firms are protected from this provision earnings, hence not paying since the first $250,000 of eamings retained each year may not be considered im- dividends, to avoid double properly accumulated taxation 4. Consolidated Tax Returns A business with subsidiaries may combine the tax retums of the parent and any consolidated tax return subsidiary which is at least 80% owned. Such combined returns are called con- tax return combining the Income of a parent solidated tax returns. There are two major benefits of consolidated tax retums. company and one or more First any intercompany business which might otherwise be taxed, such as sales of its subsidiaries or dividends, disappears in the consolidation process. Second, the losses of one subsidiary can offset the earnings of another further lowering taxable income. 5. Corporate Tax Rate If taxable income is positive, the corporation pays taxes at a flat 21% rate. Example Calculating Corporate Tax A corporation determines its taxable income to be $25 million Question: What will its U.S. income tax obligation be? Solution step: 21%