Calculating After Tax Cost of Debt Simplified
If you run any type of business, there will come a time when you need to acquire debt. You may need to purchase equipment or add a wing to your facility. You might want to open a second location or embark on a special new marketing campaign. An emergency might arise that will require you to produce funds for payroll. You may need to acquire loan products for those purposes. You may also need to calculate your after-tax cost of debt for business purposes or individual knowledge. The following is some information about the after-tax cost of debt and how you can calculate that figure for yourself:
You may have heard the term "cost of debt" at one time or another. Every loan product has a cost to it. For example, you will need to pay something other than the exact loan figure if you need to borrow money. Your loan will have an interest rate attached to it, for one. Secondly, you may have to pay processing fees, finance charges, and other individuals fees, depending on the provider. In business, the cost of debt usually refers to the interest the organization has to pay for a specific loan product to mature. The costs don't usually include the other expenses mentioned previously. However, you may use those figures if you want to get a more accurate picture of what a loan product truly costs you.
What Is the After-Tax Cost of Debt?
The after tax cost of debt is a special calculation that takes into account any tax breaks or deductions a business might receive. Businesses have the right to claim certain expenses on their income taxes, and they receive a deduction in their taxable income when they do so. Therefore, the after tax cost of debt is the interest paid on a company's debt minus the amount of money that such a business would save on their income taxes. The process of figuring out your after-tax cost of debt would require you to partake in a several-step process.
Example of Calculating the After-Tax Cost of Debt
You will need to gather a few figures before you can calculate your after-tax cost of debt. The first thing you will need to find is your annual interest rate. You can locate that information on any of your original loan documents. For the sake of a future example, we'll say that it's 20 percent. We'll also say that the loan amount is $50,000.
The next piece of information you will need is your tax rate. The tax rate is a percentage that your business has to pay on your taxable income. In this example, we'll say that your tax rate is 30 percent. Once you have all of those figures in front of you, you can go ahead and start to calculate the after-tax cost of the debt you have.
If you have a $50,000 loan with a 20 percent annual interest rate, you will have to pay $10,000 a year in interest on that loan. That's the first calculation you need to do to start figuring out your after-tax debt cost. This figure is your cost of debt, and it's also an interest expense that you can claim on your annual income taxes. That expense is going to reduce your taxable income by $10,000.
We mentioned that the tax rate on your taxable income is 30 percent. Thirty percent of $10,000 is $3,000. The $3,000 figure is the amount of savings that you will receive on your taxes. What you need to do now is subtract the cost of debt from the savings you'll receive to calculate your after-tax cost of debt. In the above-mentioned example, you would need to deduct $3,000 from $10,000 to get a $7,000 figure. The $7,000 figure is the amount that the debt will cost you after you receive your tax deductions. It is the after-tax cost of your debt.
Using After-Tax Cost of Debt for Personal Finances
There may be other times when you can use the after-tax cost of debt calculations. You don't have to be a full-on business, for example. You can use it to calculate your after-tax cost of debt if you are a hybrid worker or a sole proprietor. As a sole proprietor, you'll have access to expenses that you can claim on your income taxes, as well. Thus, you can use the formula to calculate your after-tax expenses in that situation. Your figures may be much different.
Why You Need to Calculate the After-Tax Cost of Debt
The main benefit of calculating your after-tax cost of debt is to see where your business can get savings. You may also need to obtain an accurate figure for how much you're spending so that you can weigh your options before you take a particular loan product. Maybe you want to obtain a full financial profile to see how much your business profits. You can have myriad reasons for wanting to conduct this simple calculation, and you should use it whenever you feel you need to.
How to Get the Most out of Your Taxes
To get the most out of your taxes, you need to stay informed at all times. You will need to know your tax rates so that you can use the appropriate figures when conducting calculations. You can always find tax figures and other helpful information by visiting the IRS's page. You need to stay abreast of new information on tax rates, credits, deductions, and other information. Many businesses and individuals fail to receive the benefits they deserve because they don't know what's available to them.
Another way to get the most out of your taxes is to have a professional do them for you. Tax professionals have the latest resources and tools to help you maximize your business deductions. If you're an individual, then a tax preparer will have the necessary tools to get you the largest refund.
Alternatively, you can use the most reliable tax software to do your taxes. You'll need to be careful when it comes time to select the appropriate tax preparation software. The software will take you through the various steps and provide you with guidance every step of the way. That way, you can maximize your benefits even if you're the independent type who enjoys calculating your own taxes.
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Steps for Becoming Debt-Free as a Business or Individual
Debt free living will most likely be your goal, whether you're an individual or a business entity. It's a smart way to live, no matter how you operate every day. The following are some tips that can help you:
Find Other Ways to Finance Things
One way to stay debt-free is to try to do without it as much as possible. That means making a more active effort to find other ways to finance your projects. For example, you can apply for business grants to fund your ventures instead of business loans. You can request assistance from family members, business acquaintances, and interested parties when you need to embark on a new journey. Accumulating debt isn't always the best option, and it shouldn't be your first option all the time.
Pay Extra on Your Debts
Paying your debts down as much as possible is another thing you should do to move toward debt-free living. The interest is something you should pay close attention to. You need to try the best you can to pay at least the minimum amount due plus the interest for each month. That will help you pay down your debt faster. Furthermore, you should consider doubling up on your debt payments.
Consolidate Debt When Possible
A debt consolidation is another great idea if you want to free yourself from debt. A consolidation will reduce the interest rate for you and also make your debt more manageable. Many people have seen positive results from partaking in debt consolidations.
Gain Access to Additional Funds
Another thing you will need to do is to try to gain access to additional funds that you can use to pay your debt down. You may want to consider working a second job or selling items of value that you no longer need.
Check Your Credit Report
Stay up to date on your credit report at all times. You have the right to request one free credit report each year from the credit bureaus. You should make sure that you do that. Once you have the report in your hands, you should examine it carefully and take action if you find erroneous information, incorrect balance information, or entire accounts that you don't seem to recognize. You have the right to dispute any of the information on your credit report. Therefore, you should do so if you feel as though a piece of your information is wrong.
Takes the steps mentioned above, and you should be well on your way to living a debt-free life as a business or individual.
Contact Us if You Need Help
You should now have more of an understanding of what you need to do to calculate yours after tax cost of debt. However, we are here to help you if you need any further assistance with your debt and taxes. Our company prides itself on the wealth of information we keep available for our clients. We are advocate individuals and companies who desire to grow. Therefore, we put great efforts into making available the information that these entities and individuals need to expand their horizons. You can find educational materials, loan products, and individuals to help you through your journey by accessing our resources. We will still provide you with the option to contact us at any time with questions or concerns. You can reach out to us by telephone or inquiry form to ask for help. One of our friendly agents will guide you or instruct you. We are not a lender, but we can help you connect to one.
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