Monico Company is a cash-basis, calendar-year sole proprietorship. The owner, Rob, is in the 32 percent marginal tax bracket this year. If Monico bills its customers at the beginning of December, it will receive $5,000 of income prior to year-end. If it bills its customers at the end of December, it will not receive the $5,000 until January of next year.
a. If Rob expects his marginal tax rate to remain 32 percent next year, when should the company bill its customers? Use a 6 percent discount factor to explain your answer.
b. How would your answer change if Rob’s expected marginal tax rate next year is only 24 percent? Explain.
c. How would your answer change if Rob’s expected marginal tax rate next year is 35 percent? Explain.