Question

You are a tax consultant and recently you signed an agreement with Pioneer Company to review some proposals and help the company plan for its coming tax years.
Answer the following independent proposals by providing calculations and explanations for your opinion/recommendations.

1. The company is planning to provide services to a client and receives $90,000 in year 2020. The client has the option to pay the money in the current year or over the next 3 years. Accordingly, Pioneer has the option of reporting the profit in the current year or over the next 3 years. Assume that Pioneer’s uses 9% discount rate and its marginal tax rate is 35% in year 2020 and 40% in the next three years.

Which option should the company select? And why? (7 marks)

2. The company has the opportunity to engage in a transaction that will generate a total cash of $180,000 that will be considered a taxable income in the year received. Pioneer will receive $100,000 in year 0 and $80,000 in year 1. The company has the option to restructure the above transaction and receive $107,500 in year 0 and $80,000 in year 1. However, Pioneer should recognize the total amount received as a taxable income in year 0. The company’s investment manager rejected the restructure of the above proposal. Assume the company uses 8% discount rate and has a marginal tax rate of 35%. Do you agree with the investment manager decision? Assuming you disagree, provide the appropriate calculations and explain your recommendation. (6 marks)

3. The company has $60,000 to invest. The investment manager proposed two options. Option (A) is to invest in municipal bonds paying 7% annual interest. Option (B) is to invest in a corporate bond paying 9.5% annual interest. Both investments have similar risks. Assume that Pioneer has 15% marginal tax rate. The investment manager recommended to invest the money in municipal bonds.
a. Why in your opinion, the investment manager selected option (A)?
b. What is your recommendation to Pioneer? And why?
c. Would your recommendation change if you apply implicit and explicit tax concepts for the above proposal? And why? (7 marks)