Tatun Inc. pays state income tax at a 5% rate and federal income tax at a 21% rate. Tatun recently engaged in a transaction in Mexico, which levied a $25,200 income tax on the transaction. Tatun's pretax net income for the current year is $1,913,900. Compute Tatun's total income tax burden assuming that:A. The Mexican tax is nondeductible for state and federal tax purposes. B. The Mexican tax is deductible for state and federal tax purposes.
What will be an ideal response?
A. Tatun's state tax is $95,695 ($1,913,900 × 5%), and its federal tax is $381,823 ([$1,913,900 ? $95,695 deduction for state tax] × 21%). Tatun's total income tax burden is $502,718 ($95,695 state tax + $381,823 federal tax + $25,200 Mexican tax).
B. Tatun's state tax is $94,435 ([$1,913,900 ? $25,200 deduction for Mexican tax] × 5%), and its federal tax is $376,796 ([$1,913,900 ? $94,435 deduction for state tax ? $25,200 deduction for Mexican tax] × 21%). Tatun's total income tax burden is $496,431 ($94,435 state tax + $376,796 federal tax + $25,200 Mexican tax).
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