1. IEN255 Chapter 8 - Taxes Agenda Net Income Corporate Income Taxes
Gains and Losses
Tax Rate in Economic Analysis

2. 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

3. 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

4. Example 8.1
only the table on 415

5. Net Income vs Cash Flow
Fig 8.1

6. Example 8.2
table in example only

7. Example 8.2 (continued)
fig 8.2

8. Corporate Income Taxes (how to calculate)
Marginal Tax Rate - on pure income
table 8.1

9. Corporate Income Taxes (how to calculate)
Effective Tax Rate
example 8.3 all page comments

10. 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)

11. 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( /2)
= $6160
Book Value = $ $6160 = $3840
Disposal in year 5
Total depreciation = $10,000( /2)
= $8848
Book Value = $ $8848 = $1152

12. Tax Treatment of Gains or Losses (cont)
fig 8.3

13. 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

14. Calculations of Capital Gains Tax
fig 8.4

15. example 8.5

16. Tax Rate in Economic Analysis
Tax Rates Vary
What rate to use in analysis?
Table on 427
Income tax w/o project = ( ) = $12,500
Income tax with project = ( ) = $18,850

17. Tax Rate in Economic Analysis (cont)
0.25($5000/$20,000) ($15,000/$20,000) = 31.75%
fig 8.6 and table below it

18. Example 8.6
table on 429
0.39($15,000/$50,000) ($35,000/$50,000) =
0.39($15,000/$44,000) ($29,000/$44,000) =

19. 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

20. Example 8.7
solution a and b

21. Consideration of Investment Tax Credits
Not now, but maybe in the future

22. Electing to Expense or Capitalize
If your company invests < $200,000/year in equipment
you can expense up to $17,500 of equipment each year.

23. IEN255 Summer’99
Test III Thursday!!!!!