Kimo Company is a cash-basis, calendar-year sole proprietorship. The owner, Karina, is in the 24 percent marginal tax bracket this year. Kimo owes a $15,000 expense that it may pay before the end of this year or in January of next year.
a. If Karina expects her marginal tax rate to be 24 percent next year, should Kimo pay the expense this year or next? Use a 7 percent discount factor to explain your answer.
b. How would your answer change if Karina’s expected marginal tax rate next year is only 22 percent? Explain.
c. How would your answer change if Karina’s expected marginal tax rate next year is 32 percent? Explain.