Chapter 13, Problem 1QPD

Why does a corporation’s state income tax cost depend on its marginal income tax rate for federal purposes?

To determine

Explain the reason for which the corporation’s state income tax cost depends on income tax rate for federal purposes.

Explanation of Solution

• Corporations could deduct state income tax paid during the calculation of federal taxable income.
• Thus, the after-tax cost of the state tax payment should reveal the federal tax savings from the deduction, which is a task of the corporation’s marginal tax rate.