R3.5 – Role of Taxes in Decision Making and Common Tax Return Elections Flashcards
Role of Taxes in Decision-Making
Individuals and businesses make decisions based on the tax implications of the decisions
Marginal tax rates used in decision making
Note: do not consider TMV unless specifically directed to on the exam.
Role of Taxes in Decision-Making – Asset Dispositions
Asset dispositions = abandonment, sale, or trade
Asset dispositions can have immediate tax effect. The increases or decrease in taxes paid cause increases or decreases in cash outlay related to the acquisition.
Role of Taxes in Decision-Making – Asset Dispositions: Abandonment
Net salvage value = reduction of initial investment in new asset
Book value = sunk cost, therefore not relevant to decision-making process
Remaining book value deductible as loss → reduces liability in year of abandonment → reduces new asset’s initial investment in capital budgeting process.
Role of Taxes in Decision-Making – Asset Dispositions: Sale
If new asset acquisition requires sale of old assets, subsequent gain or loss has no effect on cap ex decision because BV of old asset is sunk cost
Cash received from sale of old asset reduces new investment’s value
Gain (loss) increases (decreases) income taxes
Income taxes paid on gain on sale = reduction of sales price: increase initial expenditure
Role of Taxes in Decision-Making – Asset Dispositions: Trade-In
No gain/loss recognized on trade-in of old asset: no tax effect
Old asset BV = part of depreciable basis of new asset
– Additional depreciation for tax purposes in later years and decrease of taxes payable in those years. Therefore cash outflows decrease in later years.
Common Tax Return Elections, Part I
Election to waive Net Operating Loss Carryback Period [127(b)(3)]
Election to not Apply Like-Kind Exchange Regulations [1.168(i)-6]
Election to Use MACRS Alternative Depreciation System [168(g)(7)]
Election to Use MACRS Straight-Line Method [168(b)(3)(D)]
Election to Use MACRS 150% Declining Balance Method [168(b)(2)(C)]
Common Tax Return Elections, Part II
Election to Treat All Rental Real Estate Interest as a Single Activity [469(c)(7)(A)]
Election to Use MArk-to-Market Method of Accounting [475(f)]
Election to Defer Gain on Sale of Public Securities [1044(a)]
Election to Amortize a Bond Premium [171(c)]
Election to Expense Certain Start-up Costs and Organizational Expenditures (currently a deemed election that requires no election statements)
Common Tax Return Elections, Part III
Election to Amortize Qualified Expenditures (e.g. R&D, mining development and exploration cost) [59(e)(4)]
Election to Expense Intangible Drilling and Development Costs for Nonproductive Wells [263(c)]
Election to Deduct Shareholder Losses before Nondeductible Expenses
Election to Capitalize Taxes and Carrying Charges on Unimproved and Unproductive Land [1.266-1(b)(1)]
Election to Deduct Disaster Loss in Preceding Tax Year [165(i)]
Common Tax Return Elections, Part IV
Election to Average Farm Income over 3 years [1301]
Election to Treat Net Capital Gain or Qualified Dividends as Investment Income
Election to Treat Mortgage Debts as Unsecured [1.163-10T(o)(5))i)]
Various Elective Deferral of Income Under Retirement Plans
Election to Take a Deduction or a Credit for Taxes Paid to Foreign Countries (even taxes paid by a partnership)
