Question

Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year.

Calculate the after-tax cost of each payment assuming he has a 30 percent marginal tax rate. (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

b. $700 of interest on a short-term loan incurred in September and repaid in November. Half of the loan proceeds were used immediately to pay salaries and the other half was invested in municipal bonds until November.

c. $1,055 for office supplies in May of this year. He used half of the supplies this year and he will use the remaining half by February of next year.

d. $830 for several pairs of work boots. Christopher expects to use the boots about 80 percent of the time in his business and the remainder of the time for hiking. Consider the boots to be a form of clothing.

Answer 1

Solution:-

b. $700 of interest on a short-term loan incurred in September and repaid in November. Half of the loan proceeds were used immediately to pay salaries and the other half was invested in municipal bonds until November:-

After-tax cost - $595

Explanation:-

$595 = $700 × [1 - (0.5 × 0.3)] - half of the interest is not deductible.

c. $1,055 for office supplies in May of this year. He used half of the supplies this year and he will use the remaining half by February of next year:-

After-tax cost - $739

Explanation:-

$739 = $1,055 × (1 - 0.3) - all deductible since used within the next year.

d. $830 for several pairs of work boots. Christopher expects to use the boots about 80 percent of the time in his business and the remainder of the time for hiking. Consider the boots to be a form of clothing:-

After-tax cost - $830

Explanation:

$830 - not deductible.