Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 12 percent on her investments. a. What is the after-tax cost if Isabel pays the $20,000 bill in December? Answer is complete and correct. After-tax cost $ 12,600 b. What is the after-tax cost if Isabel pays the $20,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) Answer is complete but not entirely correct. After-tax cost $ 13,148 c. Based on requirements a and b, should Isabel pay the $20,000 bill in December or January? December January EXHIE Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 3-1 Present Value of a Single Payment at Various Annual Rates of Return 4% 5% 6% 7% 8% 9% 10% 11% 12% 962 952 .943 .935 .926 917 909 .901 .893 .925 .907 .890 .873 .857 .842 .826 .812 .797 .889 .864 .840 .816 .794 .772 .751 .731 .712 .855 .823 .792 .763 .735 .708 .683 .659 .636 .822 .784 .747 .713 .681 .650 .621 .593 .567 .790 .746 .705 .666 .630 .596 .564 .535 .507 .760 .711 .665 .623 .583 .547 .513 .482 .452 .731 .677 .627 .582 .540 .502 .467 .434 .404 .703 .645 .592 .544 .500 .460 .424 .391 .361 .676 .614 .558 .508 .463 .422 .386 .352 .322 .650 .585 .527 .475 .429 .388 .350 .317 .287 .625 .557 .497 .444 .397 .356 .319 .286 .257 .601 .530 .469 .415 .368 .326 .290 .258 .229 .577 .505 .442 .388 .340 .299 .263 .232 .205 .555 .481 .417 .362 .315 .275 .239 .209 .183 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $43,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $43,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 8 percent on her investments. a. What is the after-tax cost if Isabel pays the $43,000 bill in December? Answer is complete and correct. After-tax cost $ 27,090 b. What is the after-tax cost if Isabel pays the $43,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) After-tax cost c. Based on requirements a and b, should Isabel pay the $43,000 bill in December or January? December January .650 EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 962 .952 .943 .935 926 917 .909 901 .893 Year 2 925 .907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5 .822 .784 .747 .713 .681 .621 .593 .567 Year 6 .790 .746 .705 .666 .630 .596 .564 .535 .507 Year 7 .760 .711 .665 .623 .583 .547 .513 .482 .452 Year 8 .731 .677 .627 .582 .540 .502 .467 .434 .404 Year 9 .703 .645 .592 .544 .500 .460 424 .391 .361 Year 10 .676 .614 .558 .508 .463 .422 .386 .352 .322 Year 11 .650 .585 .527 475 .429 .388 .350 .317 .287 Year 12 .625 .557 .497 .444 .397 .356 .319 .286 .257 Year 13 .601 .530 .469 .415 .368 .326 .290 .258 .229 Year 14 .505 .442 .388 .340 .299 .263 .232 .205 Year 15 .555 481 417 .362 .315 .275 .239 .209 .183 .577 Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship In late December he performed $26,000 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 37 percent this year and next year, and that he can earn an after-tax rate of return of 9 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? Answer is complete and correct. After-tax income $ 16,380 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.) Answer is complete but not entirely correct. After-tax income $ 9,828 c. Based on requirements a and b, should Manny send his client the bill in December or January? December January EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 962 952 .943 935 926 .917 .909 901 .893 Year 2 .925 907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5 .822 .784 .747 .713 .681 .650 .621 .593 .567 Year 6 .790 .746 1.705 .666 .630 .596 .564 .535 .507 Year 7 .760 .711 .665 .623 .583 .547 .513 .482 .452 Year 8 .731 .677 .627 1582 .540 .502 ,467 .434 404 Year 9 .703 .645 .592 .544 .500 .460 .424 .391 .361 Year 10 .676 .614 .558 .508 .463 .422 .386 .352 .322 Year 11 .650 .585 .527 .475 .429 .388 .350 .317 .287 Year 12 .625 .557 .497 .444 .397 .356 .319 .286 .257 Year 13 .601 .530 .469 .415 .368 .326 .290 .258 .229 Year 14 .577 .505 .442 .388 .340 .299 .263 .232 .205 Year 15 .555 481 .417 .362 .315 .275 .239 .209 .183 Required information [The following information applies to the questions displayed below.] Tawana owns and operates a sole proprietorship and has a 37 percent marginal tax rate. She provides her son, Jonathon, $8,000 a year for college expenses. Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent. d. How much money would the strategy save? (Round your intermediate calculations and final answers to the nearest whole dollar amount.) Answer is complete but not entirely correct. This strategy will save Tawana $ 12,690 protax and will save the family $ 3,206 Orie and Jane, husband and wife, operate a sole proprietorship. They expect their taxable income next year to be $450,000, of which $250,000 is attributed to the sole proprietorship. Orie and Jane are contemplating incorporating their sole proprietorship. (Use the tax rate schedule.) a. Using the married-joint tax brackets and the corporate tax rate, find out how much current tax this strategy could save Orie and Jane. (Round your intermediate calculations and final answer to nearest whole dollar amount.) Current tax saved b. How much of the income should be converted into corporate income to maximize tax savings? Income left 2020 Tax Rate Schedules Individuals Schedule X-Single If taxable income is over: But not over: The tax is: $ 0 $ 9,875 10% of taxable income $ 9,875 $ 40,125 $987 50 plus 12% of the excess over $9.875 $ 40,125 $ 85,525 $4,617 50 plus 22% of the excess over $40,125 $ 85,525 $163,300 $14,605 50 plus 24% of the excess over $85,525 $163,300 $207,350 $33,271.50 plus 32% of the excess over $163,300 $207,350 $518.400 $47,367 50 plus 35% of the excess over $207,350 $518,400 $156,235 plus 37% of the excess over $518,400 Schedule Y-1-Married Filing Jointly or Qualifying Widow(er) If taxable income is over: But not over: The tax is: $ 0 $ 19,750 10% of taxable income $ 19,750 $ 80,250 $1.975 plus 12% of the excess over $19,750 $ 80,250 $171.050 $9.235 plus 22% of the excess over $80,250 $171.050 $326,600 $29.211 plus 24% of the excess over $171,050 $326,600 $414,700 $66 543 plus 32% of the excess over $326,600 $414,700 $622,050 $94.735 plus 35% of the excess over $414,700 $622,050 $167 307 50 plus 37% of the excess over $622,050 Schedule Z-Head of Household If taxable income is over: But not over: The tax is: $ 0 $ 14,100 10% of taxable income $ 14,100 $ 53,700 $1.410 plus 12% of the excess over $14,100 $ 53,700 $ 85,500 $6.162 plus 22% of the excess over $53,700 $ 85,500 $163,300 $13,158 plus 24% of the excess over $85,500 $163,300 $207,350 $31.830 plus 32% of the excess over $163,300 $207,350 $518,400 $45.926 plus 35% of the excess over $207,350 $518.400 $154,793 50 plus 37% of the excess over $518.400 Schedule Y-2-Married Filing Separately If taxable income is over: But not over: The tax is: $ 0 $ 9,875 10% of taxable income $ 9.875 $ 40,125 5987 50 plus 12% of the excess over $9,875 $ 40,125 $ 85,525 $4,617 50 plus 22% of the excess over $40,125 $ 85 525 $163,300 $14,605 50 plus 24% of the excess over $85 525 $163,300 $207,350 $33.271.50 plus 32% of the excess over $163,300 $207 350 $311025 547 367 50 plus 35% of the excess over $207,350 $311.025 583,653.75 plus 37% of the excess over $311,025 Hyundai is considering opening a plant in two neighboring states. Option 1: One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,000,000 pretax profit. Option 2: The other state has a corporate tax rate of 2 percent. If operated in this state, the plant is expected to generate $930,000 of pretax profit. a. What is the after state taxes profit in the state with the 10% tax rate? Answer is complete and correct. After state taxes profit $ 900,000 b. What is the after state taxes profit in the state with the 2% tax rate? Answer is complete but not entirely correct. After state taxes profit $ 744,000 c. Which state should Hyundal choose? Option 1 Option 2