Leasing the building will allow John to write off the payments as rent expense. However, if he has the capital to purchase the building, it would be considered an asset and he would be allowed to depreciate over the life of the building. This decision would have to weigh factors such as: capital investment, loan options if no capital investment, and expected future profits and expenses of the business. 2. Jane Smith tax issues: Issue a) What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes?
29) Qualified residence interest consists of both acquisition indebtedness and home equity interest. 30) Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence. 31) A taxpayer is allowed to deduct interest expense incurred on home equity indebtedness limited to the lesser of $100,000 or the home equity (FMV of the residence less the acquisition indebtedness). 32) While points paid to purchase a residence are deductible as interest in the period paid, points associated with the refinancing of a residence must be amortized and deducted over the life of the
In year 2 it reports a $40,000 loss. For year 3, it reports taxable income from operations of $100,000 before any loss carryovers. Using the corporate tax rate table, determine how much tax Willow Corp. will pay for year 3. Answer: $4,500. Description (1) Year 3 taxable income $100,000 (2) Year 1 NOL carryforward ($30,000) (3) Year 2 NOL carryforward ($40,000) (4) Taxable income reported 30,000 (1) - (2) -
How is the $25,000 treated for purposes of federal tax income? The issue is how the $25,000 of reimbursed expenses will be treated for federal income tax purposes. According to the Internal Revenue Code Sec. 162, “Ordinary and necessary expenses incurred to carry on a trade or business are deductible.” Since the $25,000 reimbursed expenses were in relation to the services provided, it will need to be included in gross income but will be treated as a deduction to the adjusted gross income. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Fin 517 Ch. 15 Notes Debt and Taxes 15.1 The Interest Tax Deduction 1. interest tax shield – additional amount that a firm would have paid in taxes if it did not have leverage. Interest tax shield = corporate tax return X interest payments 2. because interest expense is tax deductible, leverage increases the total amount of income available to all investors 15.2 Valuing the Interest Tax Shield 1. when a firm uses debt, the interest tax shield provides a corporate tax benefit each year. 2. Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield, by the Law of One Price the same must be true for the present values of these cash flows.
The second ratio measures the effect of interest; it indicates the proportion of earnings before interest and tax that is retained after paying interest. It should be considered together with the leverage component (assets/equity). The third ratio measures the company’s operating profit on sales; it can be broken down into subcomponents such as gross profit margin. Common-sized income statements can help with
The first statement is the income statement. An income statement documents the income for a period of time. External users, such as investors and creditors utilize income statements as an indication of future performance-based on past income when deciding whether to invest in a company or the probability of loan repayment. Internal users, such as managers and owners may use the net income to verify sales goals or justify bonus payment. When preparing the income statement, the first entry is revenue.
Chapter 8: Date placed in service (see concept summary 8.1 in the text). The applicable system of depreciation or cost recovery is dependent on the date the property is placed in service. The small business jobs act of 2010 extended 50% additional first-year depreciation for qualified property acquired and placed in service before january 1, 2011. The tax relief act of 2010 extended additional first-year depreciation for qualified property acquired and placed in service before january 1, 2013. The percentage is 100% for property placed in service after september 8, 2010 and before january 1, 2012.
Note that the actual state rate is reduced by 25% to allow for the deductibility of state income taxes on the federal income tax return. Thus, she should choose the corporate bond. When the state rate is 10%, Dana would achieve the following returns from the Treasury bond or the corporate bond: The Treasury bond would still yield $1,125 or $30,000 x [.05 x (1-.25)] after tax because state rates don’t affect after- tax returns from Treasury bonds. The corporate bond yields $1,215 or $30,000 x [.06 x (1 - .25 - .10(1-.25))] after tax. Again, note that the actual state rate is reduced by 25% to allow for the deductibility of state income taxes on the federal income tax return.
Week 4 Case Study Fresh &Fruity Foods Inc. 1. Average Collection Period =Accounts Receivable/ Average daily credit sales Accounts receivable =$209,686 Average daily Credit sales =$1,179,000/360 =$3,275 Average collection Period =$209,686/$3,275 =64.02 days 2. Cost of forgoing the cash discount: Kdis=2%/100%-2% x 360/f(67)-d(10)= .1307= 13.07% The formula tells us that Fresh and Fruity is effectively paying 13.07% interest to delay paying the discounted amount for 57days (the 67 days on which they pay less the 10 day discount period). 3. Average Collection Period x Average Daily credit Sales= New Accounts receivable 32x 3,275=$104,800 Freed-up Cash = old accounts receivable $209,686 - new accounts receivable $104,800