Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 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 37 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? b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) Exhibit 3.1 below 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 .962 .952 .943 .935 .926 .917 .909 .901 .893 Year 2 .925 .907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5 .822 .784 .747 .713 .681 .650 .621 .593 .567 Year 6 .790 .746 .705 .666 .630 .596 .564 .535 .507 Year 7 .760 .711 .665 .623 .583 .547 .513 .482 .452 Year 8 .731 .677 .627 .582 .540 .502 .467 .434 .404 Year 9 .703 .645 .592 .544 .500 .460 .424 .391 .361 Year 10 .676 .614 .558 .508 .463 .422 .386 .352 .322 Year 11 .650 .585 .527 .475 .429 .388 .350 .317 .287 Year 12 .625 .557 .497 .444 .397 .356 .319 .286 .257 Year 13 .601 .530 .469 .415 .368 .326 .290 .258 .229 Year 14 .577 .505 .442 .388 .340 .299 .263 .232 .205 Year 15 .555 .481 .417 .362 .315 .275 .239 .209 .183 c. Based on requirements a and b, should Manny send his client the bill in December or January? multiple choice December January

Individual Income Taxes

43rd Edition

ISBN:9780357109731

Author:Hoffman

Publisher:Hoffman

Chapter6: Deductions And Losses: In General

Section: Chapter Questions

Problem 40P

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Question

Manny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 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 37 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?

b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.)

Exhibit 3.1 below

	4%	5%	6%	7%	8%	9%	10%	11%	12%
Year 1	.962	.952	.943	.935	.926	.917	.909	.901	.893
Year 2	.925	.907	.890	.873	.857	.842	.826	.812	.797
Year 3	.889	.864	.840	.816	.794	.772	.751	.731	.712
Year 4	.855	.823	.792	.763	.735	.708	.683	.659	.636
Year 5	.822	.784	.747	.713	.681	.650	.621	.593	.567
Year 6	.790	.746	.705	.666	.630	.596	.564	.535	.507
Year 7	.760	.711	.665	.623	.583	.547	.513	.482	.452
Year 8	.731	.677	.627	.582	.540	.502	.467	.434	.404
Year 9	.703	.645	.592	.544	.500	.460	.424	.391	.361
Year 10	.676	.614	.558	.508	.463	.422	.386	.352	.322
Year 11	.650	.585	.527	.475	.429	.388	.350	.317	.287
Year 12	.625	.557	.497	.444	.397	.356	.319	.286	.257
Year 13	.601	.530	.469	.415	.368	.326	.290	.258	.229
Year 14	.577	.505	.442	.388	.340	.299	.263	.232	.205
Year 15	.555	.481	.417	.362	.315	.275	.239	.209	.183