Question

For each of the following scenarios, indicate which 1 of the 4 basic tax planning variables (entity, character, time period, jusrisdiction) impacts after-tax value. Note that more than 1 may apply to any scenario; identify ALL that are relevant.

a. Aloha Corp is considering building a new manufacturing facility in either State U or State P. State U has a 10% state income tax rate. State P has a 15% state income tax rate but offers a tax holiday for new business invesment that would exempt up to $250,000 of Aloha's earnings from state income tax for the 1st five year of operations in State P.

☐ Entity Variable

☐ Character variable

☐ Time period variable

☐Jurisdiction variable

b. Mary wishes to help her nephew, Gill, pay his college tuition. Instead of giving Gill cash, Mary gives him bonds earning $10,000 annual interest income. Mary's marginal tax rate is 35%, and Gill's marginal tax rate is 12%.

☐ Entity Variable

☐ Character variable

☐ Time period variable

☐Jurisdiction variable

c.Congress has recently enacted a decrease in corp tax rates that will take effect at the beginning of next year. Grant Co, a cash basis taxpayer, is planning to pay expenses prior to year-end in order to maximize its tax savings in the current year.

☐ Entity Variable

☐ Character variable

☐ Time period variable

☐Jurisdiction variable

d. Will has $50,000 to invest in the stock market. He is considering 2 alternatives. Stock A pays annual qualifying dividends of 6%. Stock B pays no dividends but is expected to increase in value at a rate of 5% per year. Will would hold either investment for a minmum of 4 years. Will's marginal tax rate on ordinary income is 35%.

☐ Entity Variable

☐ Character variable

☐ Time period variable

☐Jurisdiction variable

Answer 1

a)

• Entity variable as there is the advantage of tax holiday for new business investments
• Time period variable as the new business is for a particular period
• Jurisdiction variable as it is only for State P for a particular area

b)

• Entity as changed taxation from one hand to another
• Time period: as it is based on annual income

c)

• Entity - as it for corporate taxable persons
• Time period- as it is the upcoming year change and not in the present. Hence comparing two-time periods

d)

• Character- as two different natured and different % rate stocks
• Time period- as the income is based on time period.