Sal, a calendar year taxpayer, uses the cash-basis method of accounting for his

Question

Sal, a calendar year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments. Should Sal send his client the bill in December or January?

Certain types of income are taxed at a lower rate than ordinary income.
T or F

Jane and Ed Rochester are married with a two-year-old child who lives with them and whom they support financially. In 2013, Ed and Jane realized the following items of income and expense:

Explanation / Answer

Sal, a calendar year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments. Should Sal send his client the bill in December or January?

If Sal collects now: $40,000 - ($40000*.30) = $28000

With a one year later earlier payment he will also earn the interest as well

If Sale collects next year: $40000 - ($4000*.35) = $26000

Definetely send the bill in December for lower taxes and interest

Certain types of income are taxed at a lower rate than ordinary income.
True - In particular, capital gains tax is at a lower rate than ordinary income

Jane and Ed Rochester are married with a two-year-old child who lives with them and whom they support financially. In 2013, Ed and Jane realized the following items of income and expense:

Can't answer this since more information is needed.

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