Andrew is considering starting a business of constructing and selling prefabri- cated greenhouses. There are three very different methods to constructing these greenhouses, and each method results in different revenue and cost projections. Below, Andrew has projected the qualifying revenue and costs for each method. The selling price includes qualifying receipts. The allocable expenses include wages and allocable expenses are included in total costs.
|
Method
|
Selling Price
|
Qualifying Receipts
|
TotalCost
|
Allocable Expenses
|
AllocableWages
|
|
#1
|
$13,000
|
$ 9,000
|
$6,500
|
$2,500
|
$2,000
|
|
#2
|
14,000
|
9,000
|
7,400
|
5,500
|
1,500
|
|
#3
|
15,000
|
14,000
|
8,600
|
2,000
|
1,000
|
a) Estimate the tax benefit from the domestic production activities deduction for each construction technique. You may assume that Andrew has sufficient AGI to utilize the deduction and that his marginal tax rate is 30 percent.
b) Which construction technique should Andrew use if his marginal tax rate is 30 percent?