Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole

Question

Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $38,000 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 40 percent this year and next year, and that he can earn an after-tax rate of return of 12 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? After-tax income b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 31. (Round your answer to the nearest whole dollar amount.) After-tax income

Explanation / Answer

Solution a:

After tax income if Manny send his client the bill in december = $38000 - ($38,000*40%) = $22,800

Solution b:

If Manny sends th bill to client in January then 40% tax will be paid at the end of next year. Therefore present value of tax payment = $38,000 * 40% * PV Factor at 12% for 1 period

= $15,200 * 0.893 = $13,574

After tax income if Manny send his client the bill in January = $38,000 - $13,574 = $24,426

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