Alternative Derivation of Formulas for the Income Tax Problem.

Abstract When computing state and federal income taxes for small corporations, a problem arises concerning the actual amount on which the tax is to be calculated. On the forms distributed by the federal and state governments the net income for federal tax purposes and the net income for state tax purposes is computed. However, the taxes are not actually calculated on these amounts, since one may first deduct from the net federal income the tax paid to the state, and from the net state income, the amount of! tax paid to the federal government. On these reduced amounts, called the net taxable income, the actual tax is calculated. Here the problem arises. Before the federal tax may be computed, the state tax must be known; before the state tax may be computed, the federal tax must be known. This fact has caused accountants who are unfamiliar with algebra to become virtual jugglers with numbers until they finally arrive at a solution. In this article the problem has been readily solved with the use of an appropriate formula.