engineering economy ien255 chapter 8 - taxes agenda net income corporate income taxes gains and...
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Engineering Economy
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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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(0.20+0.32+0.192/2)
= $6160 Book Value = $10000 - $6160 = $3840
Disposal in year 5 Total depreciation =
$10,000(0.20+0.32+0.192+0.1152+0.1152/2) = $8848
Book Value = $10000 - $8848 = $1152
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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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Tax Rate in Economic Analysis Tax Rates Vary What rate to use in analysis?
Table on 427
Income tax w/o project = 7500+0.25(70000-50000) = $12,500
Income tax with project = 13750+0.34(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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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.