Mrs. Oliver is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800,000 in the current real estate market. According to DC’s director of tax, the company’s profit on the sale will be taxed at 35 percent if the sale occurs this year. However, this tax rate will definitely decrease to 21 percent if the sale occurs next year. Mrs. Oliver is aware that DC would prefer the sale close next year. However, Mrs. Oliver needs the land immediately to begin construction of a new retail outlet. She offers to pay $875,000 for the land with the stipulation that the sale close by December 31. Required: Calculate the amount of after-tax cash for the each of the following alternatives. Alternative 2: If DC sells the land to Mrs. Oliver next year. Profit on sale Tax cost Cash proceeds from sale Tax cost After-tax cash

Mrs. Oliver is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800,000 in the current real estate market. According to DC’s director of tax, the company’s profit on the sale will be taxed at 35 percent if the sale occurs this year. However, this tax rate will definitely decrease to 21 percent if the sale occurs next year. Mrs. Oliver is aware that DC would prefer the sale close next year. However, Mrs. Oliver needs the land immediately to begin construction of a new retail outlet. She offers to pay $875,000 for the land with the stipulation that the sale close by December 31. Required: Calculate the amount of after-tax cash for the each of the following alternatives. Alternative 2: If DC sells the land to Mrs. Oliver next year. Profit on sale Tax cost Cash proceeds from sale Tax cost After-tax cash

SWFT Comprehensive Volume 2019

42nd Edition

ISBN:9780357233306

Author:Maloney

Publisher:Maloney

Chapter16: Accounting Periods And Methods

Section: Chapter Questions

Problem 35P

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Floyd, a cash basis taxpayer, has received an offer to purchase his land. The cash basis buyer will pay him either 100,000 at closing or 50,000 at closing and 56,000 two years after the date of closing. If Floyd recognizes the entire gain in the current year, his marginal tax rate will be 25% (combined Federal and state rates). However, if he spreads the gain over the two years, his combined marginal tax rate on the gain will be only 20%. Floyd does not consider the buyer a credit risk, and he understands that shifting the gain to next year with an installment sale will save taxes. Still, he realizes that the deferred payment will, in effect, earn only 6,000 for waiting two years for the other 50,000. Floyd believes he can earn a 10% before-tax rate of return on his after-tax cash. Floyds adjusted basis for the land is 25,000, the buyer is also a cash basis taxpayer, and the short-term Federal rate is 4%. Floyd has asked you to evaluate the two alternatives on an after-tax basis.
On June 30, 2019, Kelly sold property for 240,000 cash and a 960,000 note due on September 30, 2020. The note will also pay 6% interest, which is slightly higher than the Federal rate. Kellys cost of the property was 400,000. She is concerned that Congress may increase the tax rate that will apply when the note is collected. Kellys after-tax rate of return on investments is 6%. a. What can Kelly do to avoid the expected higher tax rate? b. Assuming that Kellys marginal combined Federal and state tax rate is 25% in 2019, how much would the tax rates need to increase to make the option identified in part (a) advisable?
Superior Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when the cash is collected. In 2020, Superior sold lots for $20 for which no cash was collected at the time of the sale. This cash will be collected equally over 2021 and 2022. The enacted tax rate was 40% at the time of the sale. In 2021, a new tax law was enacted, revising the tax rate from 40% to 25% beginning in 2022. Calculate the total amount by which Superior should change its deferred tax liability in 2021.
Superlor Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when the cash is collected. In 2023, Superior sold lots for $110 million, for which no cash was collected at the time of the sale. This cash will be collected equally over 2024 and 2025. The enacted tax rate was 40% at the time of the sale. In 2024, a new tax law was enacted, revising the tax rate from 40% 10 30% beginning in 2025. Calculate the total amount by which Superior should change its deferred tax liabllity in 2024. Note: Enter your answer in millions rounded to 2 decimal places (i. e., 5,500,000 should be entered as 5, 50).
7) Ms. Benoit is a self-employed architect who earns $300,000 annual taxable income. For the past several years, her tax rate on this income has been 35 percent. Because of recent tax law changes, Ms. Benoit’s tax rate for next year will decrease to 25 percent. a) Based on a static forecast, how much less revenue will the government collect from Ms. Benoit next year? b) How much less revenue will the government collect from Ms. Benoit next year if she responds to the rate decrease by working more hours and earning $375,000 taxable income? c) How much less revenue will the government collect from Ms. Benoit next year if she responds to the rate decrease by working fewer hours and earning only $275,000 taxable income?
At the beginning of the year, Mr. Lanier put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. Lanier’s marginal tax rate on ordinary income is 37 percent. However, his return on Investment X is a capital gain taxed at 20 percent. At the beginning of the year, Mr. Lanier could have invested his $50,000 in Business Z with an 8 percent annual return. However, this return would have been ordinary income rather than capital gain. Required: Considering the fact that Mr. Lanier could have invested in Business Z, how much implicit tax did he pay with respect to Investment X? Did Mr. Lanier make the correct decision by putting his $50,000 into Investment X instead of Business Z?
Specialty Corp is a cash basis calendar-year taxpayer. The corporation has a 25 percent marginal tax bracket this year. It will receive an additional $5,000 this year if it bills its customers at the beginning of December. But if it bills its customers at the end of December, it will not receive the $5,000 until January of next year. If Specialty Corp’s marginal tax rate next year is estimated to be 15 percent, when would the company most likely bill its customers? Specialty Corp. would bill its customers at the beginning of December. Specialty Corp would bill its customers in the middle of December Specialty Corp would bill its customers at the end of December. It will not matter when the company bills its customers for tax purposes
Hayden’s Recreation Center purchased an asset for $240,000 that has $30,000 residual value and a seven-year life. Hayden’s effective income tax rate is 40 percent, and Hayden uses the straight-line depreciation method for income tax reporting purposes. Calculate Hayden’s annual tax savings from the depreciation tax shield. (Round your answer to the nearest whole dollar; do NOT include the dollar ($) sign.)
Specialty Corp is a cash basis calendar-year taxpayer. The corporation has a 25 percent marginal tax bracket this year. It will receive an additional $5,000 this year if it bills its customers at the beginning of December. But if it bills its customers at the end of December, it will not receive the $5,000 until January of next year. If Specialty Corp’s marginal tax rate next year is estimated to be 34 percent, when would the company most likely bill its customers? Specialty Corp. would bill its customers at the end of December. Specialty Corp. would bill its customers at the beginning of December. Specialty Corp. would defer billing its customers until next year. Specialty Corp. would bill its customers in the middle of December.
Officials for the city of Winfield have agreed to forgo real estate taxes normally charged to Jamieson Corporation for the subsequent 10 years. In exchange, Jamieson has agreed to build a distribution facility that is expected to hire 500 new employees. What information must the city provide in its financial statements to inform taxpayers and other interested parties about the nature of this tax abatement?
Your company has purchased equipment (for $50,000) that will reduce materials and labor costs by $14,000 each year for N years. After N years, there will be no further need for the machine, and because the machine is specially designed, it will have no MV at any time. The IRS, however, has ruled that you must depreciate the equipment on a SL basis with a tax life of five years. If the effective income tax rate is 20%, what is the minimum number of years your firm must operate the equipment to earn 10% per year after taxes on its investment?
"At the beginning of the year, Mr. Lanier put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. Lanier’s marginal tax rate on ordinary income is 37 percent. However, his return on Investment X is a capital gain taxed at 20 percent. Compute the value of the preferential rate to Mr. Lanier. "