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Isabel, 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. Isabel can pay the $28,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40 percent this year and next year, and that she can earn an after-tax rate of return of 11 percent on her investments. o. What is the after-tax cost if Isabel pays the $28,000 bill in December? b. what is the after-tax cost if Isabel pays the $28,000 bill in January? Use Exhiia1 (Round your answer to the nearest whole dollar amount.)
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 Mannys marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 4 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? After-tax income b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1 (Round your answer to the nearest whole dollar amount.) After-tax
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Discount factor in Exhibit 3.1 should be rounded to 3 decimal places: (e.g. 0.926) Both are individual questions, Although both have been Answered) Answers are highlighted in yellow: Solution: 1) a) & b) Isabel Option 1: Paid $28,000 this year Option 2: Paid $28,000 next year Description Rate of return Additional Expenses Marginal tax rate Additional tax savin 11% $28,000 40% 11% $28,000 40% $11,200 11,200 Discount factor Present value additional tax saving Additional Expenses -before-tax Less: Present value tax saving After-tax Cost (PV) 11%; 100%; $11,200 $28,000 ($11,200 $16,800 90.0% or 0.900 $10,080 $28,000 ($10,080 $17,920 2) a) & b) Option 1: Receive $21,000 this year Option 2: Receive $21,000 next year Manny: Description Rate of return Additional income Marginal tax rate Additional tax payment 4% 4% $21,000 21,000 37%; 37% $7,770 100% $7,770 21,000 ($7,770) $13,230 $7,770 Discount factor Present value additional tax expense Additional income -before-tax Less: Present value tax After-tax income (PV) 4% 96.2%| or 0.962 $7,475 21,000 ($7.475 $13,525

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