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Rhonda, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In...

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Accounting

Rhonda, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Rhonda can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 35 percent this year and 40 percent next year, and that she can earn an after-tax rate of return of 12 percent on her investments (note that the discount rate for $1 at an annual rate of return of 12% equals 0.893). Ronda should pay the bill

Multiple Choice

  • this year becaue a taxpayer should always accelerate deductions and defer income when individual tax rates are constant or increasing.

  • next year because the discounted tax benefit of paying the bill next year surpases the tax benefit of paying the bill this year.

  • this year because the discounted tax benefit of paying the bill next year is smaller than the tax benefit of paying the bill this year.

  • next year becaue a taxpayer should always accelerate deductions and defer income when individual tax rates are constant or are increasing.

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