IEN255 Chapter 8 - Taxes

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IEN255 Chapter 8 - Taxes

• Agenda
• Net Income
• Corporate Income Taxes
• Gains and Losses
• Tax Rate in Economic Analysis

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Net Income

• Profit vs Loss
• Revenue - Income earned as a result of providing
  products or services
• Expense - incurred as you do business
• Depreciation Expense
• Capital expenditures must be capitalized

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Taxable Income and Income Taxes

• Taxable Income Gross Income (revenues) -
  expenses
• Income Taxes (Tax Rate) x (Taxable Income)
• Voila!!!
• Net Income Taxable Income - Income Taxes

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Example 8.1

• only the table on 415

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Net Income vs Cash Flow
Fig 8.1
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Example 8.2

• table in example only

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Example 8.2 (continued)

• fig 8.2

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Corporate Income Taxes (how to calculate)

• Marginal Tax Rate - on pure income
• table 8.1

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Corporate Income Taxes (how to calculate)

• Effective Tax Rate
• example 8.3 all page 421 - comments

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Capital Gains and Losses

• Gains - an asset is sold for more than its cost
  basis
• Losses - an asset is sold for less than its cost
  basis
• Losses cannot be used to offset operating income,
  but can offset capital gains (or postponed until
  later years)

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Tax Treatment of Gains or Losses

• Disposal of MACRS - (before or during specified
  recovery period)
• Example 8.4
• Disposal in year 3
• Total depreciation 10,000(0.200.320.192/2)
• 6160
• Book Value 10000 - 6160 3840
• Disposal in year 5
• Total depreciation 10,000(0.200.320.1920.115
  20.1152/2)
• 8848
• Book Value 10000 - 8848 1152

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Tax Treatment of Gains or Losses (cont)

• fig 8.3

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Calculations of Capital Gains Tax

• Gains (losses) Salvage Value - Book Value
• (depreciation recapture)
• For tax purposes
• Capital Gains Salvage Value - Cost Basis
• Ordinary Gains Cost Basis - Book Value
• Only if capital gains are taxed at a different
  rate

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Calculations of Capital Gains Tax

• fig 8.4

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example 8.5
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Tax Rate in Economic Analysis

• Tax Rates Vary
• What rate to use in analysis?
• Table on 427
• Income tax w/o project 75000.25(70000-50000)
  12,500
• Income tax with project 137500.34(90000-75000)
  18,850

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Tax Rate in Economic Analysis (cont)

• 0.25(5000/20,000) 0.34(15,000/20,000)
  31.75
• fig 8.6 and table below it

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Example 8.6

• table on 429
• 0.39(15,000/50,000) 0.34(35,000/50,000)
  0.3550
• 0.39(15,000/44,000) 0.34(29,000/44,000)
  0.3550

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State Income Taxes

• tm tf ts - (tf)(ts) (8.1)
• tm combined marginal tax rate
• tf federal marginal tax rate
• ts state marginal tax rate

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Example 8.7

• solution a and b

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Consideration of Investment Tax Credits

• Not now, but maybe in the future

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Electing to Expense or Capitalize

• If your company invests lt 200,000/year in
  equipment
• you can expense up to 17,500 of equipment each
  year.

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IEN255 Summer99

• Test III Thursday!!!!!