Question

Paris Corporation holds a $100,000 unrealized net capital gain and a capital loss carryforward that will expire in the current year. Paris is subject to a 14 percent cost of capital. Its marginal tax rate is 25 percent. Should Paris accelerate the recognition of this gain from next year to this year, assuming a net capital loss carryforward in each of the following amounts?

1. $40,000

2. $10,000

3. Repeat the computation using the amounts in parts a and b, but this time assume that Paris is subject to a 6 percent cost of capital.

Answer 1

a)

Carry forward loss=$40000 Cost of capital=14%

Saving of tax on capital gains	$10000
Opportunity cost on Gains recognized early	$14000
Net savings	-$4000

Paris corporation should not accelerate the recognition of the gain from next year to current year as there would not be any benefit.

b)

Carry forward loss=$10000 Cost of capital=14%

Saving of tax on capital gains	$2500
Opportunity cost on Gains recognized early	$14000
Net savings	-$11500

Paris corporation should not accelerate the recognition of the gain from next year to current year as there would not be any benefit.

c)

Carry forward loss=$40000 Cost of capital=6%

Saving of tax on capital gains	$10000
Opportunity cost on Gains recognized early	$6000
Net savings	$4000

Paris corporation should accelerate the recognition of the gain from next year to current year to avail tax.

Carry forward loss=$10000 Cost of capital=6%

Saving of tax on capital gains	$2500
Opportunity cost on Gains recognized early	$6000
Net savings	-$3500

Paris corporation should not accelerate the recognition of the gain from next year to current year as there would not be any benefit.

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