Required information [The following information applies to the questions displayed below.] The legislature is considering changing tax rates from 7 percent to either 6 percent or 5 percent. Pathways Landscaping Equipment is trying to understand the impact of these changes and is using scenario analysis to assess the expected value of the impact. Before any changes are made, the base case scenario is $1,000,000 in annual taxable income at a tax rate of 7 percent. The following table summarizes the expected financial impact of each scenario, assuming that taxable income increases or decreases by 5 percent and either no changes are made in the 7 percent tax rate or the tax rate decreases to either 6 percent or 5 percent. Income Scenario Income increases by 5% Income remains unchanged Income decreases by 5% Taxable Income If Tax Rate 7%, Taxes Owed ■ $ 3,500 If Tax Rate 6%, If Tax Rate 5%, Taxes Owed Taxes Owed $ (7,000) $ (17,500) $ 1,000,000 $ 950,000 $ (10,000) $ (20,000) $ (22,500) $ 1,050,000 $ (3,500) $ (13,000) Based on Pathways' assessment of the probability of the tax-law changes and potential changes in its own taxable income, here are the joint probabilities of the changes in tax rate and taxable income. Income increases by 5% Income remains unchanged Income decreases by 5% Taxable Income $ 1,050,000 $ 1,000,000 $ 950,000 Likelihood of Each Scenario If Tax Rate -7%, Taxes If Tax Rate 6%, Taxes If Tax Rate - 5%, Taxes Owed ■ If Tax Rate - 7% 0.05 0.20 0.05 Owed - If Tax Rate 6% 0.05 0.20 0.1 Owed If Tax Rate -5% 0.15 0.10 0.1 Now assume that the tax rates are expected to change to 8 percent, 7 percent, and 6 percent with the same probabilities as Problem 1. $ 14,000 Taxable Income If Tax Rate 8%, Taxes Owed = $ 1,050,000 $ 1,000,000 $ 10,000 $ 950,000 $ 6,000 If Tax Rate = 7%, Taxes Owed $ 3,500 $ 0 $ (3,500) If Tax Rate 6%, Taxes Owed $ (7,000) $ (10,000) $ (13,000) Income Scenario Income increases by 5% Income remains unchanged Income decreases by 5% Required: Compute the value of the expected impact of the changes in tax rates on Pathways' tax burden. Note: The goal is to identify the value of the increase or decrease to taxes owed. Decreases to taxes owed should be entered as a negative value. Answer is complete but not entirely correct. Income Scenario Taxable Income 8% Tax Rate 7% Tax Rate If Tax Rate is impact impact Income Increases by 5% Income Remains the Same Income Decreases by 5% $1,050,000 200 $ 175 $ 6%, taxes owed: (350) $ 1,000,000 $ 6,000 $ 0 $ 2,000x S 950,000 $ 300 $ (350) $ (1,300) Sum of all expected changes: $ 6,675

Required information [The following information applies to the questions displayed below.] The legislature is considering changing tax rates from 7 percent to either 6 percent or 5 percent. Pathways Landscaping Equipment is trying to understand the impact of these changes and is using scenario analysis to assess the expected value of the impact. Before any changes are made, the base case scenario is $1,000,000 in annual taxable income at a tax rate of 7 percent. The following table summarizes the expected financial impact of each scenario, assuming that taxable income increases or decreases by 5 percent and either no changes are made in the 7 percent tax rate or the tax rate decreases to either 6 percent or 5 percent. Income Scenario Income increases by 5% Income remains unchanged Income decreases by 5% Taxable Income If Tax Rate 7%, Taxes Owed ■ $ 3,500 If Tax Rate 6%, If Tax Rate 5%, Taxes Owed Taxes Owed $ (7,000) $ (17,500) $ 1,000,000 $ 950,000 $ (10,000) $ (20,000) $ (22,500) $ 1,050,000 $ (3,500) $ (13,000) Based on Pathways' assessment of the probability of the tax-law changes and potential changes in its own taxable income, here are the joint probabilities of the changes in tax rate and taxable income. Income increases by 5% Income remains unchanged Income decreases by 5% Taxable Income $ 1,050,000 $ 1,000,000 $ 950,000 Likelihood of Each Scenario If Tax Rate -7%, Taxes If Tax Rate 6%, Taxes If Tax Rate - 5%, Taxes Owed ■ If Tax Rate - 7% 0.05 0.20 0.05 Owed - If Tax Rate 6% 0.05 0.20 0.1 Owed If Tax Rate -5% 0.15 0.10 0.1 Now assume that the tax rates are expected to change to 8 percent, 7 percent, and 6 percent with the same probabilities as Problem 1. $ 14,000 Taxable Income If Tax Rate 8%, Taxes Owed = $ 1,050,000 $ 1,000,000 $ 10,000 $ 950,000 $ 6,000 If Tax Rate = 7%, Taxes Owed $ 3,500 $ 0 $ (3,500) If Tax Rate 6%, Taxes Owed $ (7,000) $ (10,000) $ (13,000) Income Scenario Income increases by 5% Income remains unchanged Income decreases by 5% Required: Compute the value of the expected impact of the changes in tax rates on Pathways' tax burden. Note: The goal is to identify the value of the increase or decrease to taxes owed. Decreases to taxes owed should be entered as a negative value. Answer is complete but not entirely correct. Income Scenario Taxable Income 8% Tax Rate 7% Tax Rate If Tax Rate is impact impact Income Increases by 5% Income Remains the Same Income Decreases by 5% $1,050,000 200 $ 175 $ 6%, taxes owed: (350) $ 1,000,000 $ 6,000 $ 0 $ 2,000x S 950,000 $ 300 $ (350) $ (1,300) Sum of all expected changes: $ 6,675

SWFT Comprehensive Volume 2019

42nd Edition

ISBN:9780357233306

Author:Maloney

Publisher:Maloney

Chapter24: Multistate Corporate Taxation

Section: Chapter Questions

Problem 18DQ

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