In this video, I discuss the effect of changes tax rate on tax strategies as covered on tax compliance and planning section of the CPA exam.
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Corporations generally pay a fixed percentage of their income as tax, which is currently set at 21% for federal taxes. However, changes in laws or other external factors can modify the marginal tax rate that applies to them. This can have a significant impact on how corporations plan their taxes. Normally, when tax rates are stable or expected to go down, corporations try to bring forward their expenses to the current period to reduce taxable income and push income into future periods to delay tax payments. This strategy helps in reducing the present value of tax payments due to the time value of money.

However, if tax rates are expected to rise, the value of deductions increases since they save more in taxes in high-tax periods. Similarly, earning income in years with higher tax rates becomes less attractive due to the increased tax burden. Therefore, in an environment where tax rates are expected to increase, corporations might find it more beneficial to delay deductions to future years when they can offset higher tax rates, and to recognize income in earlier years before the rates go up.

The decision on whether to accelerate deductions or defer income depends on the corporation's discount factor, which affects how future cash flows are valued in present terms. A higher discount factor might still make it worthwhile to accelerate deductions and defer income, despite rising tax rates.

Beyond federal taxes, changes in state tax laws can also significantly affect a corporation's overall tax rate from year to year. Therefore, corporations need to stay informed about potential legislative changes at both the federal and state levels that could affect their tax strategies.





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