Firm E operates in a jurisdiction that levies an income tax with the following rate structure: Rate Bracket 7% Income from $0 to $75,000 10% Income from $75,001 to $150,000 15% Income in excess of $150,000 Firm E has the opportunity to invest in a business project that should generate $20,000 of additional taxable income for the year. Compute the tax cost of this additional income assuming that: a. Firm E’s taxable income before considering the additional income is $130,000.
b. Firm E’s taxable income before considering the additional income is $2 million.
c. Firm E has a loss of $8,000 before considering the additional income. (Assume that the $8,000 loss may offset any taxable income in the current year.)

a. $2,000

b. $3,000

c. $1,190

Explanation:

a. Taxable income before considering additional income of $20,000 is $130,000.

Total taxable income after consideration = 130,000 + 20,000

= $150,000

Tax cost is within 10% tax bracket so cost of additional income is;

= 20,000 * 10%

= $2,000

b. a. Taxable income before considering additional income of $20,000 is $2 million.

Total taxable income after consideration = 2,000,000 + 20,000

= $2,020,000

Tax cost is within 15% tax bracket so cost of additional income is;

= 20,000 * 15%

= $3,000

c. Assuming loss can offset taxable income the taxable income would be;

= 20,000 - 3,000

= $17,000

This falls under the 7% range so the tax cost will be;

= 17,000 * 7%

= $1,190

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