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Published byAubrie Wiggins Modified over 9 years ago
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Reviewing…Reviewing… We covered the following depreciation methods: Straight Line Declining Balance Sum of Years Digits Units of Production MACRS – Modified Accelerated Cost Recovery System
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Effective Tax Rates Terminology: Federal Tax Rate (FTR) Federal Taxable Income Federal Taxes = Federal Tax Rate x Federal Taxable Income State Tax Rate (STR) State Taxable Income State Taxes = State Tax Rate x State Taxable Income
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Effective Tax Rates State taxes are deductible when calculating Federal taxable income. Effective Tax Rate = FTR (1 – STR) + STR
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Marginal Tax Rates Tax rates for corporations and individuals vary depending on the amount of taxable income. Different tax rates apply to incremental income.
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Marginal Tax Rates 2010 Federal Personal (Single) Tax Schedule Taxable IncomeTax Rate $0 to $8,35010% $8,350 to $33,95015% $33,950 to $82,25025% $82,250 to $171,55028% $171,550 to $372,95033% $372,950 and up35% These marginal tax rates apply to personal income – and business income that is reported via personal income tax returns (proprietorships and partnerships). Corporations have an additional surtax in some income ranges, sometimes resulting in a higher marginal tax rate (see next slide).
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Marginal Tax Rates 2010 Federal Corporate Tax Schedule Taxable IncomeTax Rate $0 to $50,00015% $50,001 to $75,00025% $75,001 to $100,00034% $100,001 to $335,00039% $335,001 to $10,000,00034% $10,000,001 to $15,000,00035% $15,000,001 to $18,333,33338% $18,333,334 and up35%
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Average Tax Rate vs. Marginal Tax Rate Example: $125,000 in taxable income Average Tax Rate: Marginal Tax Rate:
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AssumptionsAssumptions Company already has taxable income. We need to know the marginal tax rate. Assume project will keep me in the same marginal tax bracket.
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After Tax Analysis 1.Determine Taxable Income: ( + ) Income ( - ) Expenses ( - ) Interest Paid ( - ) Depreciation (Not a real cash flow) 2. Determine Taxes Use the marginal tax rate 3. Determine After Tax Cash Flow ( + ) Income ( - ) Expenses ( - ) Loan Payments ( - ) Tax cash flow
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After Tax Analysis Example: Determine year 1 cash flows with marginal tax rate of 39%: Gross Income = $7,000 Cost of Goods Sold = $1,000 Operating Expense = $3,000 Depreciation Charge = $2,000 Loan Payment = $2,802 Interest Expense = $1,200
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Sale of Asset 1. End of the year taxable income from sale = Sale Price – Book Value 2. Tax cash flow from sale of the asset = taxable income from sale x marginal tax rate 3. After tax cash flow = sale price – tax cash flow from sale of the asset
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Early Sale of Asset Half Year Convention: 1. It is assumed that an asset is put into service half-way through the initial year – so only ½ year of depreciation may be claimed in Year 1. MACRS table takes care of this, automatically 2. If selling an asset before the final year of MACRS depreciation, only ½ year of depreciation may be claimed in that year … Reduce depreciation amount by ½, and… Increase book value by ½ depreciation amount
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Sale of Asset Example A machine was purchased on January 1, 1999, for $10,000. It has been depreciated using the MACRS 5 year schedule. It can be sold for $8,000 on December 31, 2001. Determine the After Tax Cash Flow (ATCF) for the sale of the machine. The marginal tax rate is 35%.
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A machine was purchased on January 1, 1999, for $10,000. It has been depreciated using the MACRS 5 year schedule. It can be sold for $8,000 on January 1, 2002. Determine the After Tax Cash Flow (ATCF) for the sale of the machine. The marginal tax rate is 35%. Sale of Asset Example with a Twist - 1!
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A machine was purchased on January 1, 1999, for $10,000. It has been depreciated using the MACRS 5 year schedule. It can be sold for $2,000 on December 31, 2001. Determine the After Tax Cash Flow (ATCF) for the sale of the machine. The marginal tax rate is 35%. Sale of Asset Example with a Twist - 2!
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