Assume Sarah is a cash-method, calendar-year taxpayer, and she is considering making the following cash payments related to her business. Calculate the after-tax cost of each payment assuming she is subject to a 37 percent marginal tax rate. (Do not round intermediate calculation.)

a. $1260

b. $652

c. $978

d. No after-tax cost is calculated since it is not deductible.

Details of Remaining Part of the Question

The following are payments that were supposed to be listed for the question:

 a. $2000 payment for next year's property taxes on her place of business.

b. $800 to reimburse the cost of meals incurred by employees while traveling for the business.

c. $1200 for football tickets to entertain out-of-town clients during contract negotiations.

d. $500 contribution to the mayor's re-election campaign

Explanation:

Calculation of after tax cost equation

a. After tax cost = Payment Due × (1 - Marginal rate)

After tax cost  = $2000×(1 - 0.37) = $1260

After tax cost for Sarah is $1260. Since it is property tax, the entire amount will be tax deductible according to the 12 month rule.

b. Calculation of after tax cost equation for reimbursement

After tax cost = Reimbursement cost  × (1 - (Reduction on meals×Marginal rate))

After tax cost  = $800×(1 - (0.5×0.37)) = $652

Only half the cost of meals is deductible.

c. Calculation of after tax cost equation for Football ticket

After tax cost = Football ticket cost  × (1 - (Tax exemption×Marginal rate))

After tax cost  = $1200×(1 - (0.5×0.37)) = $978.

Only half the cost of entertainment is deductible.

d. Since the cost here is not directly related with the business, this will not be tax deductible. So the $500 contribution to the mayor's re-election campaign is not tax deductible, therefore no after-tax cost is calculated.

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c is the correct answer.