45 Tax Considerations

4.5.1 After Tax Cash Flows

Taxes are a fact of life in both personal and business decision making. Taxes occur in many forms and are primarily designed to generate revenues for governmental entities ranging from local authorities to the Federal government. A few of the most common forms of taxes are income taxes, ad valorem taxes, sales taxes, and excise taxes. Cash flows used for economic analysis should always be adjusted for the combined impact of all relevant taxes. To do otherwise, ignores the significant impact that taxes have on economic decision making. Tax laws and regulations are complex and intricate. A detailed treatment of tax considerations as they apply to economic analysis is beyond the scope of this chapter and generally requires the assistance of a professional with specialized training in the subject. A high level summary of concepts and techniques that concentrate on Federal income taxes are presented in the material which follows. The focus is on Federal income taxes since they impact most decisions and have relatively wide and general application.

The amount of Federal taxes due are determined based on a tax rate multiplied by a taxable income. The rates (as of April 2000) are determined based on tables of rates published under the Omnibus Reconciliation Act of 1993 as shown in Table 4.1. Depending on income range, the marginal tax rates vary from 15% of taxable income to 39% of taxable income. Taxable income is calculated by subtracting allowable deductions from gross income. Gross income is generated when a company sells its product or service. Allowable deductions include salaries and wages, materials, interest payments, and depreciation as well as other costs of doing business as detailed in the tax regulations.

The calculation of taxes owed and after tax cash flows (ATCF) requires knowledge of:

• Before Tax Cash Flows (BTCF), the net project cash flows before the consideration of taxes due, loan payments, and bond payments;

• Total loan payments attributable to the project, including a breakdown of principal and interest components of the payments;

• Total bond payments attributable to the project, including a breakdown of the redemption and interest components of the payments; and

• Depreciation allowances attributable to the project.

Table 4.1 Federal tax rates based on the Omnibus Reconciliation Act of 1993

Taxable Income

Taxes

Marginal

(TI)

Due

Tax Rate

$0 < TI < $50,000

0.15*TI

0 0

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