A company has pre-tax or operating income of $120,000. If the tax rate is 40%, what is the company's after-tax income?

Question

BlackTom AI · Accepted Answer

After-tax income equals operating (pre-tax) income multiplied by (1 − tax rate), so use that relationship directly.

Relevant concepts:
- Pre-tax (operating) income is the profit before taxes are deducted.
- The tax payment = pre-tax income × tax rate.
- After-tax income = pre-tax income − tax payment = pre-tax income × (1 − tax rate).

Step-by-step calculation with intermediate steps:
1. Identify values: pre-tax income = $120,000; tax rate = 40% = 0.40.
2. Compute tax paid: tax paid = $120,000 × 0.40 = $48,000.
3. Compute after-tax income: after-tax income = $120,000 − $48,000 = $72,000.
   Alternatively: after-tax income = $120,000 × (1 − 0.40) = $120,000 × 0.60 = $72,000.

Why this answer is correct:
The tax reduces the pre-tax income by the portion equal to the tax rate. Multiplying by (1 − tax rate) correctly removes that portion and yields the income that remains to the company after paying taxes. Both subtraction and direct multiplication approaches give the same result ($72,000), confirming the arithmetic.

Why other possible answers would be incorrect (common mistakes):
- $48,000 would represent only the tax paid, not the after-tax income.
- $120,000 would ignore taxes entirely (pretending tax rate = 0%).
- Any other value (for example $80,000) would result from an incorrect tax percentage or miscalculation (e.g., subtracting the tax rate as dollars or using the wrong tax base).

Conclusion: The company's after-tax income is $72,000, which matches the provided correct answer of $72,000.

A company has pre-tax or operating income of $120,000. If the tax rate is 40%, what is the company's after-tax income?单项选择题

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