Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole

Question

Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $35,000 bill from her accountant for consulting services related to her small business. Reese can pay the $35,000 bill anytime before January 30 of next year without penalty. Assume Reese’s marginal tax rate is 32 percent this year and will be 37 percent next year, and that she can earn an after-tax rate of return of 10 percent on her investments.

a. What is the after-tax cost if she pays the $35,000 bill in December?

b. What is the after-tax cost if she pays the $35,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.)

c. Based on requirements a and b, should Reese pay the $35,000 bill in December or January?

December

January

Course : federal taxe procedure

Explanation / Answer

Ans. Let's start the calculations and answer straightaway.

a) After tax cost if bill is paid in December.

$35000 × 32/100 = $11,200

$35000 - $11200 = $23800 after tax cost.

b) After tax cost if bill is paid in January.

$35000 × 37 / 100 = $12950

$12950 / 1.10 = $11770( round off )

So $35000 - $11770 = $23230 after tax cost.

c) Reese should pay the $35000 bill in December.

I hope this answer is clear to you. Do ask in case of any doubts.

Best of Luck ! Keep Chegging !

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