1. - Isabel, a calendar-year taxpayer, uses the cash method of accounting for her soleproprietorship. In late December s...

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Isabel, a calendar-year taxpayer, uses the cash method

April 14, 2018

1. - Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole
proprietorship. In late December she received a $13,000 bill from her accountant for
consulting services related to her small business. Isabel can pay the $13,000 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 7
percent on her investments.
A. – What is the after-tax cost if Isabel pays the $13000 bill in December?
B. – What is the after-tax cost if Isabel pays the $13000 bill in January? Use Exhibit 3.1.
C. – Based on requirements A and B, should Isabel pay the $13000 bill in December or
January?

2. Daniel is considering selling two stocks that have not fared well over recent years. A
friend recently informed Daniel that one of his stocks has a special designation, which
allows him to treat a loss up to $36,000 on this stock as an ordinary loss rather than the
typical capital loss. Daniel figures that he has a loss of $43,200 on each stock. If Daniel’s
marginal tax rate is 35 percent and he has $86,400 of other capital gains (taxed at 15
percent), what is the tax savings from the special tax treatment?
Tax Savings =










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