If a country's corporate tax rate is flat, when does it not make sense for a firm to hedge?
What will be an ideal response?
Answer: A convex tax code imposes a larger tax rate on higher incomes and a smaller tax rate on lower incomes. If a country's tax rate is flat, a key question is how losses are treated. If losses are subsidized immediately at the same rate that gains are taxed, there is no tax advantage to hedging. But, losses are usually not subsidized, as losses are typically only allowed to be deducted against future income. These tax-loss carry-forwards usually do not grow with the time value of money; nor are they indexed to inflation.
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Rutgers Rotisserie Corporation earned a profit in 2019. In 2020, its balance sheet, revenue, cost structure are exactly the same, EXCEPT the IRS reduces the corporate profits tax rate. Which of the following will be higher this year than last?
a) before tax profit b) taxes c) after-tax profit d) change in cash
Mr. Wall owned an apartment building with an adjusted cost basis of $220,000 and a fair market value of $330,000. He exchanged the property for an apartment house which had a fair market value of $365,000. Both properties were free and clear and no adjustment was made for the differences in value. For federal income tax purposes, the new property will have a basis for Mr. Wall of:
A: $110,000; B: $145,000; C: $205,000; D: $220,000.