Taxes and Insurance

Expenses for taxes and insurance play an important part in determining the economic situation for any industrial process. Because Federal, state, and local taxes may amount to a major portion of a concern s earnings, it is essential for the chemical engineer to understand the basic principles and factors underlying taxation. Insurance costs ordinarily are only a small part of the total expenditure involved in an industrial operation however, adequate insurance coverage is necessary before any operation can be carried out on a sound economic basis. 

Taxes are levied to supply funds to meet the public needs of a government, while insurance is required for protection against certain types of emergencies or catastrophic occurrences. Insurance rates and tax rates can vary considerably for business concerns as compared to the rates for individual persons. The information presented in this chapter applies generally to large business establishments. 

Taxes may be classified into three types (1) property taxes, (2) excise taxes, and (3) income taxes. These taxes may be levied by the Federal government, state governments, or local governments. 

Local governments usually have jurisdiction over property taxes, which are commonly charged on a county basis. In addition to these, individual cities and 

Property taxes vary widely from one locality to another, but the average annual amount of these charges is 1 to 4 percent of the assessed valuation. Taxes of this type are referred to as direct since they must be paid directly by the particular concern and cannot be passed on as such to the consumer. 

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Land purchases and many of the costs associated with faciUty development can be accompHshed with long-term loans of 15 to 30 years. Equipment such as pumps and tmcks are usually depreciated over a few years and are funded with shorter-term loans. Operating expenses for such items as feed, chemicals, fuel, utilities, salaries, taxes, and insurance may require periodic short-term loans to keep the business solvent. The projected income should be based on a reaUstic estimate of farmgate value of the product and an accurate assessment of anticipated production. Each business plan should project income and expenses projected over the term of all loans in order to demonstrate to the lending agency or venture capitaUst that there is a high probabiUty the investment will be repaid. 

Current costs for taxes and insurance should be obtained for the proposed project site. 

Taxes and insurance are estimated to be 4% of the total capital being 1.2 million a year. 

A chemical plant has every type of cost associated with the operation of a car and many more. The major categories are raw materials, conversion costs, depreciation, sales, research, taxes and insurance, and general administration costs. A method for determining the magnitude of each of these follows. A summary is given in Table 10-2. 

The property taxes and insurance are independent of how much product is produced. 

For the chemical plant the fixed charges, those that do not vary with the throughput, are depreciation, taxes, and insurance. The labor, utilities, supplies, and sales also cost more per pound of product if the plant is not running at full capacity, but their total cost is less than if the plant were running at full capacity. 

Operating costs include the costs of raw materials, direct operating labor, labor supervision, maintenance, plant supplies, utilities (steam, gas, electricity, fuel), property taxes, and insurance. Sometimes certain operating cost components are directly expressed as a fraction of the capital investment cost. Table B.3 is a brief checklist... 

Indirect expenses Part of the manufacturing expense of a product not directly related to the amount of product manufactured, e.g., depreciation, local taxes, and insurance. 

Debits Stock cost Naphtha Extra, butanes Direct operating cost Total process costs Ethylizing Taxes and insurance Royalties... 

The costs of property taxes and insurance applicable to proved properties and wells and related equipment and facilities ... 

Taxes and Insurance taxes represent a significant payment from a... 

Property taxes and insurance estimated at 2-1/2% of onplot plus offplot per year. 

Detailed estimates similar to Table XIX were carried out for each case. The results are summarized and compared on Table XX. Factors used for labor, maintenance, taxes, and insurance are typical of those used for analyzing long-term, large scale commercial projects. The capital charge factor, the yearly rate at which the investment is charged to the project, was chosen to provide about a 15% after-tax discounted cash flow (DCF) rate of return on investment based on reasonable and commonly used assumptions for projects of this type and magnitude. These assumptions are summarized on Table XVIII. 

A balance sheet applies only at one specific time, and any additional transactions cause it to become obsolete. Most of the changes that occur in the balance sheet are due to revenue received from the sale of goods or services and costs incurred in the production and sale of the goods or services. Income-sheet accounts of all income and expense items, such as sales, purchases, depreciation, wages, salaries, taxes, and insurance, are maintained, and these accounts are summarized periodically in income statements. 

Another expense which is included under indirect plant cost is the item of construction or field expense and includes temporary construction and operation, construction tools and rentals, home office personnel located at the construction site, construction payroll, travel and living, taxes and insurance, and other construction overhead. This expense item is occasionally included under equipment installation, or more often under engineering, supervision, and construction. If construction or field expenses are to be estimated separately, then Table 15 will be useful in establishing the variation in percent of fixed-capital investment for this indirect cost. For ordinary chemical-process... 

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