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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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(0.20+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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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 = 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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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 < $200,000/year

in equipment

you can expense up to $17,500 of equipment each year.

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IEN255 Summer’99

Test III Thursday!!!!!