Question

QUESTION 1 Isabel, a calendar year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $21,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $21,000 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 afer-tax rate of return of 6 percent on her investments. What is the net cost of making the payment in December? 80,943 QUESTION 2 Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $21,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $21,000 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. What is the next cost of making the payment in January? 13.000 QUESTION 3 Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $21,000 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 24 percent this year and next year, and that he can cam an after-tax rate of return of 6 percent on his investments. What is the net benefit of collecting the bill in December? 34,659

Answer 1

Please find below table useful to compute desired results: -

B А 1 Pre-tax bill 21000 2 Marginal Tax Rate =32/100 3 Marginal Tax Rate for Next year =32/100 4 After Tax Rate of Return =6/100 5 Present Value of Tax Saving 6 Payment in December =B1*B2 7 Payment in January =B1*B3*1/(1+B4) 1 8 Net Cost: 9 Payment in December J=B1-B6 10 Payment in January =B1-B7 12 Pre-tax bill 21000 13 Marginal Tax Rate =24/100 14 Marginal Tax Rate for Next year =24/100 15 After Tax Rate of Return =6/100 16 Present Value of Tax Saving 17 Payment in December =B12 B13 18 Payment in January =B12*B14*1/(1+B15)^1 19 20 Payment in December =B12-B17 21 Payment in January =B12-B18 22 Net Benefit =B20-B21 23 It is better to collect bill in January Net Cost

End results would be as follows: -

А В 16,340 1 Pre-tax bill 21,000 2 Marginal Tax Rate 32% 3 Marginal Tax Rate for Next year 32% 4 After Tax Rate of Return 6% 5 Present Value of Tax Saving 6 Payment in December 16,720 7 Payment in January 8 Net Cost: 9 Payment in December 14,280 10 Payment in January 14,660 11 12 Pre-tax bill 21,000 13 Marginal Tax Rate 24% 14 Marginal Tax Rate for Next year 24% 15 After Tax Rate of Return 6% 16 Present Value of Tax Saving 17 Payment in December 5,040 18 Payment in January 4,755 19 Net Cost 20 Payment in December 15,960 21 Payment in January 16.245 22 Net Benefit (285) 23 It is better to collect bill in January