Cost-Plus Contract

Let’s say you paint a house for your uncle. The one who hides money in the walls because he doesn’t trust banks. He says he'll pay you $500 and any expenses tied to the job. So all your paint, gasoline, and water bottles are paid on top of the money for the gig...the money that makes the job profitable.

A contract with expenses is called a Cost-Plus Contract.

This is different than your uncle just paying you $500, and you having to pay for your paint. That version is known as a fixed-price contract.

Related or Semi-related Video

Finance: What is Cost Basis?9 Views

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Finance allah shmoop what is cost basis or set another

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way What is the basis for tax purposes of your

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cost in this stock or this investment Like you bought

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a stock a twelve bucks chair and now it's a

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thirty and you go to sell it So really why

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does all this matter One word yet our beals above

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word rhymes with smacks is so when a company or

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an individual cells something while there are three outcomes the

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asset either made money lost money or broke even if

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it broke even there's Nothing to do no tax to

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pay no paper to be filed ever been pointing out

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the cost bases was in fact the net sales price

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for the whatever but for gains Well where there are

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a lot of taxes to pay the cost basis matters

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a lot Think about a share of coca cola your

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grandpappy bought in nineteen eighty for about a dollar a

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share It's trading at fifty one dollars a share now

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so happy jed has a fifty dollars a share gain

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that he would realize meaning get taxed on if he

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sold that coke stock and turned it into cash will

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His cost basis was a dollar a share and his

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gain is taxable Gain was fifty bucks a share and

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at a long term tax rate of about forty percent

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in a blue state that would be twenty dollars in

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tax on that fifty dollars of gain and ouch Yeah

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After that sale for fifty one dollars a share of

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coke he'd be left with only thirty one bucks in

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his pocket Enormous tax Painful so painful in fact that

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his gain is so much with his cost basis so

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low Well that pappy jet is highly incentivized to never

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sell that share of coke at least not unless he

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absolutely has to In the math here is painful At

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fifty one bucks a share coke will earn three bucks

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a share this year and three fifty next So if

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he nets thirty one dollars a share in his pocket

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after the sale well then he's essentially selling coke polo

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one of the premier companies in the world at thirty

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one over three fifty or just about nine times forward

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earnings which is just a crazy low cheap price for

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one of america's premier growth companies right And yes it

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works the other way around too And no not like

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that Had he bought shares of yahoo right its peak

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at two hundred bucks a share and then held it

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a decade so that it was down teo little forty

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dollars a share Amongst that being ali baba he could

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realize attacks lost of one hundred sixty dollars a share

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by selling it And that loss and a forty percent

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tax rate marginal tax rate kind of tax rate world

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is actually worth a lot in offsetting tax gains or

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tax savings of point four times one sixty or sixty

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four dollars a share in tax savings Like you khun

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shelter gains by realizing losses Welcome to america So yeah

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there's a perverse relationship with pressure toehold versus pressure to

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sell when stocks do really well it's painful to sell

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them because taxes take such a huge bite out of

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your net gains and the opposite is true as well

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When you lose money on a stock well you're highly

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incentivized to sell that loser shelter gains on your winners

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and we'll just move the hell on Want to see

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something really freaky Right Go into the bathroom Turn off

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The lights and say the word tax me uncle sam

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Three times Just a word of warning though We want

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to keep a firm grip on your wallet If you 00:03:28.835 --> [endTime] do that there

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