Sal, a Calendar Year Taxpayer, Uses the Cash-Basis Method of Accounting

question 83

Essay

Sal, a calendar year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments. Should Sal send his client the bill in December or January?

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Definitions:

Incentive Pay

A form of compensation designed to reward employees for achieving performance targets or completing specific objectives.

Wage Inversion

A scenario where newer employees receive higher wages than their more experienced counterparts, often due to market demand or inflation.

Y2K Problem

Refers to a widespread computer bug that was predicted to cause systems to fail at the turn of the millennium because many programs represented years with only two digits.

Wage-Rate Compression

A situation where the differences in pay between different jobs or levels of responsibility decrease, often due to external pressures on wages or internal equity concerns.