Question

Where ATC = after-tax cost, BTC = before-tax cost, and MTR = marginal tax rate, the after-tax cost of tax planning can be expressed as:

a. ATC = BTC * (1-MTR).
b. a factor of the time value of money.
c. MTR * taxable income =ATC.
d. ATC = BTC ÷ (1-MTR).

Answer 1

The after-tax cost of tax planning is calculated using the formula ATC = BTC * (1-MTR), where BTC is the before-tax cost and MTR is the marginal tax rate.

Step-by-step explanation:

The question relates to the calculation of after-tax cost (ATC) of tax planning given the before-tax cost (BTC) and the marginal tax rate (MTR). The correct formula to calculate after-tax cost is ATC = BTC * (1-MTR). This formula takes into account the portion of the costs that are actually incurred after adjusting for the tax savings resulting from the deduction of the costs at the marginal tax rate.

For example, if a company's BTC on an expense is $100 and its MTR is 30%, the ATC would be $100 * (1 - 0.3) = $100 * 0.7 = $70. This is to say that, after taxes, the effective cost of the expense to the company is $70.