Chapter 13: Projecting Income Taxes
Learning Objectives
At the completion of this chapter the student should be able to:
• Define taxable income and explain how it is calculated.
• Explain the difference between corporate federal income tax and personal income tax and
Instructional Hints
• Help the students understand that an understanding of income taxes is necessary to project
the cash flow for a construction company (see Chapter 14) and that the marginal
(incremental) income tax rate is used when making decision
(see Chapter 18).
Activities
• Down load copies of IRS Form 1040 and its instructions and provide them to the students.
Have the students prepare an income tax projection for themselves for the current year
based upon last year’s taxes and making adjustments for change in their income, etc.
Instruction Resources
• The figures, sidebar, and tables from this chapter in electronic format and PowerPoint
slides can be found at the instructor’s website.
Solutions to the Textbook Problems
1. Different types of companies are taxed differently. C corporations and some partnerships pay
2. The losses may be carried back two years and then carried forward up to 20 years after the
3. The effective tax rate is the average tax rate paid on your taxable income. The marginal tax
5. A tax deduction reduces your taxable income and as a result reduces you taxes. The tax
6. The taxable income is calculated as follows:
7. The taxable income is calculated as follows:
8. For tax purposes the truck has a 5-year recovery period and is depreciated using the 200%-
declining-balance method. From Table 5-6 the depreciation for the truck is calculated as
follows:
D1 = (P)R1 = ($20,000)0.2000 = $4,000
D2 = (P)R2 = ($20,000)0.3200 = $6,400
The difference in cash flow and its deductibility for tax purposes for the first year is $16,000
($20,000 – $4,000). The difference in the cash flows is as follows:
Year
Cash Flow ($)
Depreciation ($)
Difference ($)
1
20,000
–4,000
16,000
2
0
–6,400
–6,400
3
0
–3,840
–3,840
4
0
–2,304
–2,304
5
0
–2,304
–2,304
6
0
–1,152
–1,152
9. For tax purposes the office furniture has a 7-year recovery period and is depreciated using the
200%-declining-balance. From Table 5-6 the depreciation for the office furniture is
calculated as follows:
D1 = (P)R1 = ($10,000)0.1429 = $1,429
D2 = (P)R2 = ($10,000)0.2449 = $2,449
The difference in cash flow and its deductibility for tax purposes for the first year is $8,571
($10,000 – $1,429). The difference in the cash flows is as follows:
Year
Cash Flow ($)
Depreciation ($)
Difference ($)
1
10,000
–1,429
8,571
2
0
–2,449
–2,449
3
0
–1,749
–1,749
4
0
–1,249
–1,249
5
0
–893
–893
6
0
–892
–892
7
0
–893
–893
8
0
–446
–446
10. Only 50% of the cost of the meals is deductible; therefore, only $2,500 of the cost of the
11. Only 50% of the cost of the food is deductible; therefore, only $7,500 of the expenses is
deductible for tax purposes. The difference is $7,500.
12. Tax Credit = $21,000(0.40) + $4,000(0.25) = $9,400
13. Tax Credit = $5,000(0.50) = $2,500
14. Only $12,811 ($25,622 × 0.5) of the cost of the meals is deductible. The entertainment is not
15. Only $32,629 ($65,258 × 0.5) of the cost of the meals is deductible. The entertainment is not