Implicit Rental Rate

Categories: Credit

See: Opportunity Cost.

Your firm owns its own building. You have 50 lawyers in it...lawyering. You don't show as an expense on your income statement anything for the cost of rent.

Why? Well, you own the buidling. So why would you rent it from yourself?

Well, in fact, you would/should...or should at least track it as an expense. Why? Opportunity cost. You could, in theory, rent your building to another firm, collect money from that rent, and then use it for other stuff. Like more pens and paper and laptops-for-all.

So there is an implicit rental rate of your building that should be tracked and become part of the rent line on your income statement.

Related or Semi-related Video

Finance: What is Imputed Interest Rate?1 Views

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Finance allah shmoop What is imputed interest rate Imputed guest

00:09

at or presumed based on x y and z that's

00:13

the foundation of an imputed interest rate and its chief

00:16

cheerleader Yep It's the i r s the tax people

00:20

those guys you just love to hear from Why Well

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because taxes need to be collected Right We have pork

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to buy for politicians Come on people Get with it

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So we have a zero coupon bond here We bought

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for five hundred bucks which comes do or pays off

00:34

in ten years for a thousand dollars on lee Remember

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Zero coupon bonds don't pay any interest along the way

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They just pay a one time end of period amount

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which includes interest and principal The irs taxes Bondholders imputed

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interest Yes like gains based on whatever interest rate is

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imputed by the terms of the deal So in this

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case remember that rule of seventy two thing so many

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years to doubled about it into seventy two and all

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that Yeah So in this case the money takes ten

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years to double that's ten into seventy two paying seven

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point two percent interest per year Compound it So the

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irs would take as an imputed interest Five hundred box

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times seven point two which is thirty six dollars of

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taxable imputed interest games And they would take that each

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year and you'd pay that each year on your taxes

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So if you owned this bond and we're living in

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a forty percent marginal tax bracket blue state which you

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livin bitterly even though you got no cash interest from

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this bond will you'd suffer a cash tax hit of

01:43

forty percent of thirty six or a bit under fifteen

01:46

dollars each year as you went along So that's the

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bad news you pay the cash up front The good

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news is that when the bond finally came do that

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decade later for that grand well you have already paid

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the taxes along the way And when taxes are already 00:02:01.504 --> [endTime] paid well we impute you'll be a happier camper

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