Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $20,000 bill from her accountant for consulting services related to her small business. Reese can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume Reese’s marginal tax rate is 32 percent this year and will be 37 percent next year, and that she can earn an after-tax rate of return of 12 percent on her investments. a. What is the after-tax cost if she pays the $20,000 bill in December? b. What is the after-tax cost if she pays the $20,000 bill in January 30? 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 Reese pay the $20,000 bill in December or January? multiple choice December January

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter15: Choice Of Business Entity—other Considerations

Section: Chapter Questions

Problem 58P

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Question

Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $20,000 bill from her accountant for consulting services related to her small business. Reese can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume Reese’s marginal tax rate is 32 percent this year and will be 37 percent next year, and that she can earn an after-tax rate of return of 12 percent on her investments.

a. What is the after-tax cost if she pays the $20,000 bill in December?

b. What is the after-tax cost if she pays the $20,000 bill in January 30? 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