Question

Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $28,000 bill from her accountant for consulting services related to her small business. Reese can pay the $28,000 bill anytime before January 30 of next year without penalty. Assume Reese’s marginal tax rate is 32 percent this year and will be 37 percent next year, and that she can earn an after-tax rate of return of 12 percent on her investments.

**a.** What is the after-tax cost if she pays the
$28,000 bill in December?

**b.** What is the after-tax cost if she pays the
$28,000 bill in January? Use Exhibit 3.1. **(Round your
answer to the nearest whole dollar amount.)**

**c.** Based on requirements a and b, should Reese
pay the $28,000 bill in December or January?

Answer #1

A. If she Pays $28000 bill in December:

Present value tax savings =

$28,000 tax deduction x 32 percent marginal tax rate =$. 8,960

After-tax cost = Pretax Cost -Present Value Tax Savings

=$28000 -$8960 = $19040

B. If she Pays $28000 bill in January:

Tax savings =$28000 tax deduction x 37 percent marginal tax rate =$10360 in tax savings in one year.

Present Value of Tax Savings =

$10360 x 0.893 (Discount Factor, 1Year, 12 percent)

= $9,251

After-tax cost = Pretax Cost -Present Value Tax Savings

= $28000 - $9251= $18749

C. Reese shall pay $28000 in January.Delaying her payment from December to January will decrease the present value of the cash outflow. Thus, there is a present value benefit associated with delaying her payment.

Reese, 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. Reese can pay the $19,000 bill
anytime before January 30 of next year without penalty. Assume
Reese’s marginal tax rate is 32 percent this year and will be 37
percent next year, and that she can earn an after-tax rate of
return of 4 percent on her...

Reese, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship. In late December, she
received a $35,000 bill from her accountant for consulting services
related to her small business. Reese can pay the $35,000 bill
anytime before January 30 of next year without penalty. Assume
Reese’s marginal tax rate is 32 percent this year and will be 37
percent next year, and that she can earn an after-tax rate of
return of 10 percent on her...

Isabel, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship. In late December she
received a $44,000 bill from her accountant for consulting services
related to her small business. Isabel can pay the $44,000 bill
anytime before January 30 of next year without penalty. Assume her
marginal tax rate is 37 percent this year and next year, and that
she can earn an after-tax rate of return of 9 percent on her
investments.
a. What is...

Isabel, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship. In late December she
received a $30,000 bill from her accountant for consulting services
related to her small business. Isabel can pay the $30,000 bill
anytime before January 30 of next year without penalty. Assume her
marginal tax rate is 37 percent this year and next year, and that
she can earn an after-tax rate of return of 4 percent on her
investments.
a. What is...

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...

Reese, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship. In late December, she
received a $45,000 bill from her accountant for consulting services
related to her small business. Reese can pay the $45,000 bill
anytime before January 30 of next year without penalty. Assume
Reese's marginal tax rate is 32 percent this year and 35 percent
next year, and that she can earn an after-tax rate of return of 10
percent on her investments.
a....

a. Isabel, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship. In late December she
received a $20,000 bill from her accountant for consulting services
related to her small business. Isabel has plenty of cash in the
bank to cover the bill and can pay the $20,000 bill any time before
January 5 of next year without penalty. Assume her marginal tax
rate is 30 percent this year and next year, and that she can earn...

Manny, a calendar-year taxpayer, uses the cash method of
accounting for his sole proprietorship. In late December he
performed $18,000 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 40 percent this year and next
year, and that he can earn an after-tax rate of return of 8 percent
on his investments.
a. What is the after-tax income if Manny sends
his client the bill...

Hank, a calendar-year taxpayer, uses the cash method of
accounting for his sole proprietorship. In late December, he
performed $22,000 of legal services for a client. Hank typically
requires his clients to pay his bills immediately upon receipt.
Assume his marginal tax rate is 32 percent this year and will be 37
percent next year, and that he can earn an after-tax rate of return
of 5 percent on his investments.
a. What is the after-tax income if Hank sends...

Maud, a calendar year taxpayer, is the owner of a sole
proprietorship that uses the cash method. On February 1, 2019, she
leases an office building to use in her business for $197,250 for
an 18-month period. To obtain this favorable lease rate, she pays
the $197,250 at the inception of the lease.
How much rent expense may Maud deduct on her 2019 tax return?
Round any calculations to two decimal places and round the final
answer to the nearest...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 5 minutes ago

asked 9 minutes ago

asked 32 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago