Chapter 6 Question:

Associated Constructors is a sole proprietorship owned by Mary Cortes. Its expected income for the next 6 years (Year 1 to Year 6) is shown in the excel spreadsheet (attached in the assignment folder), if Mary purchases today (Year 0) a 5-Year class piece of equipment for $150,000. Mary files her taxes as Married Filing Separately.

a. Calculate the depreciation expense, taxable income, tax liability and income after tax assuming the Straight-Line form of depreciation. Use Excel sheet 1 or space below.

b. Calculate the depreciation expense, taxable income, tax liability and income after tax assuming the MACRS form of depreciation. Use Excel sheet 1 or space below.

c. Assume that Associated Constructors is now a corporation. Mary gives herself a salary of 135,000 140,000 145,000 150,000 155,000 160,000 from Year 1 to Year 6. Calculate her personal taxes (assume no personal deductions) from Year 1 to Year 6 in Excel Sheet 2 or in the space below

d. Calculate the corporate taxes and income after taxes for Year 1 to Year 6.

Associated Constructors Year 1 to 6 Income Stream Straight- Line Depreciation Scenario Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 6 Before Tax Income 200000 300000 400000 500000 600000 700000 7 Depreciation Expense 8 Salary Expense 9 Taxable Income 10 Tax Liability (Table 6.5) 11 After-Tax Cash Flow (A6-A8-A10) 12 13 Accelerated MACRS 5-Yr Depreciation 14 15 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 16 Tax 200000 300000 400000 500000 600000 700000 17 Before Income 18 Depreciation Expense 19 Salary Expense 20 Taxable income 21 Tax Liability (Table 6.5) 22 After-Tax Cash Flow (A17-A19-A21) 23 Mary Cortes 24 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 26 Before Tax Income 135000 140000 145000 150000 155000 160000 27 Tax Liability 28 After-Tax Income TAX IMPACT yr 1 thru 6 so so TAX IMPACT yr 1 thru 6 Associated Constructors Year 1 to 6 Income Stream Straight- Line Depreciation Scenario Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 6 Before Tax Income 200000 300000 400000 500000 600000 700000 7 Depreciation Expense 8 Salary Expense 9 Taxable Income 10 Tax Liability (Table 6.5) 11 After-Tax Cash Flow (A6-A8-A10) 12 13 Accelerated MACRS 5-Yr Depreciation 14 15 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 16 Tax 200000 300000 400000 500000 600000 700000 17 Before Income 18 Depreciation Expense 19 Salary Expense 20 Taxable income 21 Tax Liability (Table 6.5) 22 After-Tax Cash Flow (A17-A19-A21) 23 Mary Cortes 24 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 26 Before Tax Income 135000 140000 145000 150000 155000 160000 27 Tax Liability 28 After-Tax Income TAX IMPACT yr 1 thru 6 so so TAX IMPACT yr 1 thru 6