Question

Mrs. O is negotiating to purchase a tract of land from DC Company, a calendar year taxpayer. DC bought this land six years ago for $480,000. According to a recent appraisal, the land is worth $800,000 in the current real estate market. According to DC’s director of tax, the company’s profit on the sale will be taxed at 35 percent if the sale occurs this year. However, this tax rate will definitely decrease to 21 percent if the sale occurs next year. Mrs. O is aware that DC would prefer the sale close next year. However, Mrs. O needs the land immediately to begin construction of a new retail outlet. She offers to pay $875,000 for the land with the stipulation that the sale close by December 31. Calculate the amount of after-tax cash for the each of the following alternatives. Should DC accept Mrs. O’s offer?

Answer 1

If DC Sell the Land this Year:-			If DC Sell the Land Next Year:-
Sale Price		$875,000.00	Sale Price		$800,000.00
Less:-			Less:-
Cost		$480,000.00	Cost		$480,000.00
Income		$395,000.00	Income		$320,000.00
Tax @ 35%		$138,250.00	Tax @ 21%		$67,200.00
Profit		$256,750.00	Profit		$252,800.00
DC company should sell their Land this Year as it will bring them a Profit of
$256750, which is $3950 more than what it will earn next year by paying 21% tax.
DC SHOULD ACCEPT MRS O OFFER.

If DC Sell the Land this Year:-			If DC Sell the Land Next Year:-
Profit on Sale		$395,000.00	Profit on Sale		$320,000.00
(875000-480000)			(800000-480000)
tax cost	35%	$138,250.00	tax cost	21%	$67,200.00
Cash Proceeds from sale		$395,000.00	Cash Proceeds from sale		$320,000.00
tax cost		$138,250.00	tax cost		$67,200.00
after tax cash		$256,750.00	after tax cash		$252,800.00
DC company should sell their Land this Year as it will bring them a Profit of
$256750, which is $3950 more than what it will earn next year by paying 21% tax.
DC SHOULD ACCEPT MRS O OFFER.

THANK YOU
HOPING FOR A POSITIVE RESPONSE