Danny is trying to determine if he should purchase equipment of this business this year or next year. He is currently in the 28% tax bracket and will be able to expense the equipment in the year he purchases it. With the new equipment, he believes that his marginal rate will increase to 33% next year. The cost of the equipment is $20,000 and his after-tax rate of return is 6%. Calculate the after-tax cost of the equipment for both years and choose the correct statement below. Show
a. The after-tax cost of the equipment is $14,400 this year or $13,400 next year. Danny should purchase the equipment this year. B Present Year: $20,000 x 0.28 = 5,600; 20,000 - 5,600 = $14,400 Next Year: $20,000 x 0.33 = $6,600 x 0.943 (PV) = 6,224; 20,000 - 6,224 = $13,776 $14,400 > $13,776 --> Next year because it is cheaper Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $17,000 bill from her accountant for consulting services related to her small business. Reese can pay the $17,000 bill anytime before January 30 of next year without penalty. Assume Reese's marginal tax rate is 30 percent this year and will be 40 percent next year, and that she can earn an after-tax rate of return of 11 percent on her investments. a. What is the after-tax cost if she pays the $17,000 bill in December? b. What is the after-tax cost if she pays the $17,000 bill in January? c. Based on requirement a and b, should Reese pay the $17,000 bill in December or January? a. $11,900 (17,000 x 0.30 = 5,100; 17,000 - 5,100 = 11,900) b. $10,873 (17,000 x 0.40 = 6,800; 6,800 x 0.901 = 6,127; 17,000 - 6,127 = 10,873) c. January a. $846,000 (940,000 x 0.10 = 94,000; 940,000 - 94,000 = 846,000) b. $882,000 (900,000 x 0.02 = 18,000; 900,000 - 18,000 = 882,000) c. Option 2 Recommended textbook solutions
Fundamentals of Financial Management, Concise Edition10th EditionEugene F. Brigham, Joel Houston 777 solutions
Calculus for Business, Economics, Life Sciences and Social Sciences13th EditionKarl E. Byleen, Michael R. Ziegler, Michae Ziegler, Raymond A. Barnett 3,913 solutions
Politics in States and Communities15th EditionSusan A. MacManus, Thomas R. Dye 177 solutions
The Cultural Landscape: An Introduction to Human Geography, AP Edition13th EditionJames M. Rubenstein 216 solutions Taxes are a necessity. Just as you wouldn’t want to overspend on other necessities like food and housing, you don’t want to spend any more than you have to in taxes. The key to frugal shopping is to conduct research and have a spending plan. The same goes for minimizing your tax bill. Tax planning strategies are made more important by the tax code’s complexity. First-time taxpayers may struggle to understand unfamiliar areas such as liabilities, deductions, and financial solutions for protecting assets and saving for the future. Fortunately, a little time spent devising tax planning strategies offers many benefits beyond tax savings. The process helps individuals and small businesses manage their finances more effectively, reducing total capital outflow and putting more money in their pockets. Tax Planning Strategies and How They HelpIn addition to saving people money, tax planning strategies help taxpayers avoid tax penalties, get the most from their tax deductions, keep their financial documents organized, and plan for the future. By contrast, doing no tax planning takes money away from life’s other necessities by increasing tax bills unnecessarily. College students are especially susceptible to unwarranted tax hits: Their parents no longer claim them as dependents on their tax returns, and they take on student loan debt. Here are some of the ways tax planning benefits college students, other individuals, and businesses, along with a look at the consequences of poor tax planning. How Tax Planning Strategies Benefit College StudentsAccording to data analyzed by Savingforcollege.com, 69% of baccalaureate graduates from U.S. colleges and universities in 2019 took out student loans, and their average student loan debt was $29,900. Forbes outlines four tax credits and deductions for recent college graduates and families with children in school. (A tax credit cuts the amount of tax a student has to pay, while a deduction reduces the amount of income that’s taxable.)
Three helpful tax breaks for college students are the American opportunity credit, which is for education expenses, with a maximum annual credit of $2,500 per student; the lifetime learning credit, which is a credit for tuition for undergraduate, graduate, and professional degree courses, worth up to $2,000 per tax return; and the student loan interest deduction, which is for interest paid on student loans, up to $2,500 per year. How Tax Planning Strategies Benefit Other IndividualsTax planning analyzes a person’s finances with the goal of achieving “maximum tax efficiency,” according to Investopedia. The analysis considers many factors:
A tax planning strategy becomes part of an overall plan for making expenditures and allocating retirement and other savings accounts. It allows you to be proactive in all spending and savings rather than reacting when the tax bill comes due. How Tax Planning Strategies Benefit BusinessesKey to a small business tax strategy is understanding the four types of business taxes that the federal government levies, as The Balance explains: income tax, self-employment tax, taxes for employers, and excise taxes. Once they’ve gathered all the tax forms they require, businesses need to ensure that they’re maximizing all available deductions and tax credits:
The Consequences of Failing to Plan for TaxesIndividuals and businesses risk more than a higher-than-necessary tax bill by not putting a tax planning strategy in place. Should they fail to make a tax payment on time, the IRS imposes penalties and interest on the unpaid amount until the balance is paid in full. The IRS levies penalties for several reasons:
For small businesses and self-employed workers, the IRS offers relief for some penalties in cases in which an effort was made to comply with tax requirements but the tax obligation wasn’t met because of circumstances beyond the taxpayer’s control. These are among the penalties that may qualify for relief:
Tax Planning Strategies for IndividualsThe adage “Watch the pennies and the dollars will take care of themselves” applies doubly to tax planning strategies for individuals. College students, recent graduates, and others struggling to make ends meet can reduce their tax obligations by taking advantage of tax-saving opportunities available to people in all income categories. Know Your Dependency StatusThe IRS defines a dependent as a qualifying child or qualifying relative:
Three tests must be met for the qualifying child or qualifying relative to be claimable as a dependent:
Gather All Required Tax FormsWhile many college students and other individual and joint filers will use Form 1040-EZ to complete their tax returns, many people can reduce their tax bills by filing the long Form 1040 along with other standard IRS tax forms. The tax forms that may be required to file an individual or a joint tax return include the following:
Understand Tuition Tax Credits and Student Loan Interest DeductionsThe IRS explains the differences between its AOTC and LLC programs that offer education credits to students and their parents:
For student loan interest deductions, the maximum deduction is the lesser of $2,500 or the actual amount of interest the person paid in the year. The deduction amount decreases and is ultimately phased out as the person’s MAGI reaches the annual limit for the filing status. The deduction is claimed as an adjustment to income, thus eliminating the need to itemize deductions to qualify for it. Know the Tax Requirements for Your Home State and School StateFor most college students, their home states remain where their families reside even if they attend out-of-state schools. Intuit explains how to determine your home state for federal tax purposes:
However, if out-of-state students earned income in the states where they attend school, they may need to file nonresident state tax returns and pay income taxes to the states. The students may also need to file state tax returns in their home states, but they’ll receive credit for any income taxes they pay to another state. Resources for Individual Tax Planning Strategies
Small Business Tax Planning StrategiesTax planning isn’t likely to be at the top of the to-do list for someone starting a business. However, small business tax planning strategies can spell the difference between success and failure for old and new businesses alike. Following are some topics that business owners need to keep in mind when preparing to meet their tax obligations, whether they handle their taxes internally or outsource their tax planning. Tax Planning Strategies for New BusinessesNew businesses need to be aware of the taxes they may be subject to, as Inc. explains:
Six helpful tax deductions for small businesses are cost of goods sold, in which you deduct costs of products you create, manufacture, or purchase for sale; qualified business income, where you deduct 20% of your income, according to the 2018 tax reform law; home office, in which you deduct part of your mortgage, rent, insurance, and utilities; travel, where you deduct costs for miles driven, tolls, plane tickets, and taxi rides; advertising, or deducting the cost of websites, social media ads, print ads, and business cards; and taxes, where you deduct self-employment taxes, state and local income taxes, and real estate taxes. Business Property DeductionsAmong the deductions the IRS allows businesses to take are those for rent payments on properties that the businesses don’t own, unless they receive equity in or titles to the properties. For home-based businesses, expenses for the use of the home may be deducted, including a percentage of mortgage interest, insurance, utilities, repairs, and depreciation. Similarly, business use of a privately owned vehicle may allow for the vehicle’s expenses to be deducted on the business’s tax return. Only the mileage attributable to business use qualifies for the deduction, which is based on miles driven and varies from year to year. Tracking Income and ExpensesThe IRS lists the type of records that small businesses and self-employed individuals need to keep for tax purposes:
Contributing to a Retirement PlanThe IRS describes the benefits for small business owners who contribute to retirement plans for themselves and their employees:
The IRS provides information that describes the types of retirement plans and retirement plans for small businesses, such as simplified employee pension (SEP) plans, as well as tips for choosing a retirement plan for a small business. Restructuring Your BusinessThe IRS requires that businesses capitalize any improvement costs, but maintenance costs that don’t improve the business, such as lighting or plumbing repair, can be deducted as business expenses. However, when businesses reorganize, they must pay a one-time restructuring charge, as Investopedia explains. Typical scenarios in which the restructuring charge applies include acquisitions, downsizing, relocating, consolidating debt, and writing off assets. Restructuring expenses are considered nonrecurring operating costs. While tax-deductible costs include starting or acquiring a new business, restructuring costs are immediately deductible only if the transaction isn’t completed. Resources for Small Business Tax Planning Strategies
Advanced Tax Planning Strategies and TipsTax planning’s benefits extend beyond the current tax year and accrue over time. Forbes describes five advanced tax planning strategies that offer big payoffs in the future.
Deducting More Complex ExpensesTaxpayers who itemize rather than take the standard deductions for their tax brackets need to know whether they qualify for any tax deductions and credits the IRS offers. NerdWallet lists the most common deductions and credits for individuals.
Adding Employee BenefitsBusinesses can deduct the cost of providing certain benefits to their employees, including health plans and gifts. The Balance Small Business describes the employee benefits that companies can deduct from their taxes.
Note that employee awards, such as gift cards, gift certificates, sporting event tickets, meals, lodging, vacations, and securities, aren’t tax deductible. Importance of Tax PlanningFor individuals and businesses alike, the key to achieving their goals is planning. Tax planning’s importance is evident in the amount of money that can be saved by taking steps to minimize the tax burden. Those steps will change as a business grows or a person advances in a career. However, the need for careful strategic tax planning remains from beginning to end. Examples of Beneficial Tax Planning StrategiesThe sooner you begin developing a strategic tax plan, the quicker you can realize the benefits. Financial services firm Brady Ware describes four scenarios in which a specific tax planning strategy paid dividends.
How Lack of Planning Can Raise Your Tax BillEvery December, some taxpayers rush to find ways to reduce their tax bills for the year. USA.gov provides a rundown on recent tax law changes, including which tax breaks are being extended, late changes in tax forms and instructions, and changes in fees and deductions.
No business or individual can expect to achieve success without having well-thought-out plans that include strategies for minimizing their tax bills. The key is to have a tax planning strategy that’s thorough but also flexible enough to adapt as economic, social, and political conditions change. A tax plan that’s complete and up to date will pay bountiful rewards today and tomorrow. Infographic Sources IRS, American Opportunity Tax Credit IRS, Deducting Business Expenses IRS, Lifetime Learning Credit IRS, Topic No. 456 Student Loan Interest Deduction What are the 3 basic tax planning strategies?There are a number of ways you can go about tax planning, but it primarily involves three basic methods: reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.
What are the different types of tax planning?Types of Tax Planning. Short-range tax planning. Under this method, tax planning is thought of and executed at the end of the fiscal year. ... . Long-term tax planning. This plan is chalked out at the beginning of the fiscal and the taxpayer follows this plan throughout the year. ... . Permissive tax planning. ... . Purposive tax planning.. What is basic tax planning?Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan.
What are the strategies of tax management?Here are a few common tax planning strategies that all businesses can consider.. Utilize Depreciation. ... . Section 199A and the 20% Pass-Through Deduction. ... . Timing Considerations. ... . Accounting Method Planning. ... . Utilize Charitable Contributions. ... . Pass-through Entity Taxes. ... . Reporting Foreign Assets. ... . The Importance of Tax Planning.. |