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Tax planning

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Mona, a calendar-year taxpayer, uses the cash-basis method of accounting for her whole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Mona can pay the $20,000 bill any time 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 12 percent on her investments.

When should she pay the $20,000 bill - this year or next? Please explain.

Thank you.

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Solution Summary

Your response is in Excel and *ATTACHED*. It shows that the benefit of the lower taxes now outweighs what you could earn on the funds not used for one month.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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