Christopher is a cash-method, calendar-year taxpayer, and he made the following

Question

Christopher is a cash-method, calendar-year taxpayer, and he made the following cash payments related to his business this year.

Calculate the after-tax cost of each payment assuming he has a 30 percent marginal tax rate. (Do not round intermediate calculations and round your final answer to the nearest dollar amount.)

a. $1,240 fine for speeding while traveling to a client meeting.

b. $590 of interest on a short-term loan incurred in September and repaid in November. Half of the loan proceeds were used immediately to pay salaries and the other half was invested in municipal bonds until November.

c. $945 for office supplies in May of this year. He used half of the supplies this year and he will use the remaining half by February of next year.

d. $945 for several pairs of work boots. Christopher expects to use the boots about 75 percent of the time in his business and the remainder of the time for hiking. Consider the boots to be a form of clothing.

Explanation / Answer

Answer

A.

$1,240 fine is not tax deductible,

Penalty or fine is nondeductible expenditure.

B.

Half of interest is not tax deductible

$590 *(1-(30%*50%)) = $501.50

The half of the loan amount is reinvested in municiple bonds,so it is not considered.

C.

$945*(1-0.30) =$661.50

all allowable under the 12-month rule. Note that property taxes are generally deductible as paid (subject to 12-month rule) unless an election is made under Sec. 461(c) to deduct them as accrued.

D.

$945 for several pairs of work boots is not tax deductible,

Works boots are not allowed as tax deduction.

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