Yvette Thirdgill has a small sewing and tailoring
shop in the basement of her home. She uses the single telephone line into the
home for both business and personal calls. She estimates that 50 percent of the
phone use is for business. Until 2006 she allocated the basic cost of the telephone
line, $20 per month, between business and personal use and charged $10 per
month for telephone services on her income statement submitted to the tax
authorities.
Assume that beginning in 2006, Canada Revenue Agency rules that no portion
of the first phone line into a residence is allowed as an expense for tax purposes.
However, if a second line is installed and used strictly for business
purposes, its total cost is allowed as an expense. The phone company charges $20
per month for a second line.
Thirdgill’s marginal income tax rate is 40 percent.
1. Under the old tax law (in effect before 2006), how much extra per
month (after tax effects) would Thirdgill have paid for a second phone
line?
2. Under the new tax law (in effect beginning in 2006), how much extra
per month (after tax effects) would Thirdgill pay for a second phone
line?
3. How might the new tax law affect the demand for second phone lines?