Question

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $19,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $19,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40 percent this year and next year, and that she can earn an after-tax rate of return of 4 percent on her investments.
a.
What is the after-tax cost if Isabel pays the $19,000 bill in December?




b.
What is the after-tax cost if Isabel pays the $19,000 bill in January? Use Exhibit 3.1. (Round your intermediate calculations and final answer to the nearest whole dollar amount.)




c. Based on requirement a and b, should Isabel pay the $19,000 bill in December or January?
December
January

Answer 1

Answer:

A) Isabel's after-tax cost for paying the bill in December = $19,000 - ($19,000 x 40%) = $19,000 - $7,600 = $11,400

B) Isabel's after-tax cost for paying the bill in January:

the cost before taxes = $19,000 - ($19,000 x 4%/12) = $19,000 - $63 = $18,937

after-tax cost = $18,937 - ($18,937 x 40%) = $18,937 - $7,575 = $11,362

C) January, since the cost of the debt is lower.