Frequent amendments in the tax code such as the

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Unformatted text preview: taxes on income. The income of sole proprietorships and partnerships is taxed as the income of the individual owners; corporate income is subject to corporate taxes. Regardless of their legal form, all businesses can earn two types of income: ordinary and capital gains. Under current law, these two types of income are treated differently in the taxation of individuals; they are not treated differently for entities subject to corporate taxes. Frequent amendments in the tax code, such as the Economic Growth and Tax Relief Reconciliation Act of 2001 (reflected in the following discussions), make it likely that these rates will change before the next edition of this text is published. Emphasis here is given to corporate taxation. Ordinary Income ordinary income Income earned through the sale of a firm’s goods or services. The ordinary income of a corporation is income earned through the sale of goods or services. Ordinary income is currently taxed subject to the rates depicted in the corporate tax rate schedule in Table 1.4. CHAPTER 1 TABLE 1.4 The Role and Environment of Managerial Finance 29 Corporate Tax Rate Schedule Tax calculation Range of taxable income $ 0 50,000 75,000 100,000 to $ to to to 50,000 75,000 100,000 335,000a 335,000 to 10,000,000 Over $10,000,000 Base tax $ (Marginal rate 0 7,500 13,750 amount over base bracket) (15% (25 (34 (39 (34 (35 22,250 113,900 3,400,000 amount over $ amount over amount over 0) 50,000) 75,000) amount over 100,000) amount over 335,000) amount over 10,000,000) aBecause corporations with taxable income in excess of $100,000 must increase their tax by the lesser of $11,750 or 5% of the taxable income in excess of $100,000, they will end up paying a 39% tax on taxable income between $100,000 and $335,000. The 5% surtax that raises the tax rate from 34% to 39% causes all corporations with taxable income between $335,000 and $10,000,000 to have an average tax rate of 34%. EXAMPLE Webster Manufacturing, Inc., a small manufacturer of kitchen knives,...
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This document was uploaded on 01/19/2014.

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