Question

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 investments.

a. What is the after-tax cost if she pays the $35,000 bill in December?

    

b. What is the after-tax cost if she pays the $35,000 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 $35,000 bill in December or January?

    

December

January

​Course : federal taxe procedure

Answer 1

a. What is the after-tax cost if she pays the $35,000 bill in December?

After tax cost = Bill amount x (1- Tax rate)

After tax cost = 35000 x (1- 32%)

After tax cost = $23,800

b. What is the after-tax cost if she pays the $35,000 bill in January?

After tax cost = Bill amount - Bill amount x New tax rate /(1+Interest rate)

After tax cost = 35000 - 35000 x 37% /(1+10%)

After tax cost = $23,227

c. Based on requirements a and b, should Reese pay the $35,000 bill in December or January?

Pay in bill in January because the calculated amount for January option is lower than December option.