Effective Tax Rate in Interviews

Wanna go the extra mile? A little tax knowledge can help. Couple of tips from someone in the tax field:

• Tax rate is going to vary depending on the fact pattern that is presented to you. If you're working with an entity that is treated as a corporation for US tax purposes, the federal rate is 21% and state and local rates will depend on where it does business. If the entity is a pass-through (like a partnership), the ultimate owner of that entity is liable for tax at their specific tax rate.
• Again, let's assume you're working with a corp. The federal rate is 21% but the effective rate can be reduced by any of a number of expenses. That includes state and local taxes as well as interest payments on debt to third or related parties. This is why corporate entities are often capitalized with a shareholder loan: it can extract cash from the business and reduce the effective tax rate.
• Final assumption: you have a corp without any expenses except for state tax at a 9% rate (that's a little high for a state tax but in the ballpark). Your effective tax rate will end up being 19.1% (21% * (1 - 9%)). This gets you closer to that 20% rate you were expecting in the first place. But don't forget, this is just the entity-level tax. Pay a dividend to your shareholders and they may pay a 20% qualified dividend rate. If you factor that cost in, boom, you're back up to around 40%. In my experience, it's not common to combine the two--entity and personal tax--so asking for clarity on the question will show attention detail that can raise your profile.