Question

Hank, 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. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 32 percent this year and will be 37 percent 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 Hank sends his client the bill in December?After- tax income ?b. What is the after-tax income if Hank sends his client the bill in January? (Do not round intermediate calculations. Round "PV Factor" to 3 decimal places. Round your answer to 2 decimal places.)after-tax income ?c. Should Hank send his client the bill in December or January?DecemberJanuaryd. What is the after-tax income if Hank expects his marginal tax rate to be 25 percent next year and sends his client the bill in January? (Round "PV Factor" to 3 decimal places. Round your answer to 2 decimal places.)After-tax income ?

Answer 1

Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship.

a. The after-tax income if Hank sends his client the bill in December

= $26,098.40

b. The after-tax income if Hank sends his client the bill in January:

= $23,700.60

c. Hank should send his client the bill in December.

d. After-tax income if Hank expects his marginal tax rate to be 25% next year and sends his client the bill in January:

= $28,215

Step-by-step explanation:

a) Data and Calculations:

Value of services performed = $38,000

Marginal tax rate this year = 32%

Marginal tax rate next year = 37%

After-tax return on investments = 12%

1. Bill sent in December:

After-tax income

For services rendered = $25,840 ($38,000 * (1 - 0.32))

After-tax return on $25,840 investment for 1 month = $258.40 ($25,840 * 12%)/12

Total after-tax income = $26,098.40

2. Bill sent in January:

After-tax income

For services rendered = $23,700.60 ($38,000 * (1 - 0.37) * 0.990

3. Bill sent in January with marginal tax rate = 25% next year:

After-tax income

For services rendered = $28,215 ($38,000 * (1 - 0.25) * 0.990