Question

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $19,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $19,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 32 percent this year and next year, and that she can earn an after-tax rate of return of 6 percent on her investments

1- What is the net cost of making the payment in December?

2-What is the next cost of making the payment in January?

Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $19,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 8 percent on his investments.  

3-What is the net benefit of collecting the bill in January?

4-What is the net benefit of collecting the bill in December?

No need explanation just answer

Answer 1

Let us compute the after-tax cost.

• After-tax cost = Amount billed - Present value tax savings
• After-tax cost = $19,000 - $6,080 = $12,920

1) The after-tax cost if Isabel pays the $19,000 bill in December is $12,920.

2) Isabel's after-tax cost for paying the bill in January:

Let us compute the after-tax cost.

• After-tax cost = Amount billed - Present value tax savings
• After-tax cost = $19,000 - $6,080 = $12,920

Present value of tax = 6080 x 0.943 (Discount Factor,1 Year, 6%)

= 5735.85

After-tax cost = 19000 - 5735.85 = $ 13,264.15

3 . 19,000 * 37% = 7030
19,000 - 7030 = 11,970

$19,000 taxable income x 37 percent marginal tax rate = $7,030 in tax in one year.

4. Present Value of Tax = $7030 x .925 (Discount Factor, 1 Year, 8 percent) = $6509.26
After-tax income = Pretax income - Present Value Tax
19,000 - 6509.26 = 12,190.74