Copyright 2013 Pearson Education Inc publishing as Prentice
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -1
AN INTRODUCTION TO TAXATION (1 of 2) ® History of taxation ® Types of tax rate structures ® Other types of taxes ® Criteria for a tax structure ® Entities in Federal income tax system Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -2
AN INTRODUCTION TO TAXATION (2 of 2) ® Tax law sources ® Enactment of a tax law ® Administration of the tax law and tax practice issues ® Components of a tax practice ® Computer applications in tax practice Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -3
History of Taxation Revenue Acts (1 of 2) ® First Federal income tax in 1861 ® Repealed after Civil War ® Reinstated in 1894 ® Supreme Court ruled unconstitutional in 1895 ® 16 th Amendment on March 1, 1913 ® Revenue acts prior to codification in 1939 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -4
History of Taxation Revenue Acts (2 of 2) ® How tax law is changed or modified Federal income tax is changed on an incremental basis rather than a complete revision The tax law has been referred to as a quiltwork of tax law Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -5
History of Taxation Revenue Sources 50% Individual FICA Corporate Other 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1960 1975 1994 2010 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -6
Types of Tax Rate Structures ® Structure of individual income tax rates ® Structure of corporate tax rates ® Marginal, average, and effective tax rates for taxpayers ® Determination of taxable income and tax due Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -7
Structure of Individual Income Tax Rates (1 of 2) ® Tax Base Amount to which tax rate is applied to determine tax due ¬E. g. , individual’s tax base for Federal income is taxable income, ¬Tax base for property tax generally FMV of property subject to tax ® Tax Rate Percentage(s) applied to tax base Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -8
Structure of Individual Income Tax Rates (2 of 2) ®Progressive Rate increases as tax base increases ¬E. g. , individual income tax ®Proportional E. g. , or flat tax sales tax ®Regressive Rate decreases as tax base Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -9
Structure of Corporate Tax Rates (1 of 2) ® Stair-step Tends pattern of progression to benefit small corporations ® Benefit of graduated tax rates phased out between $100 K and $335 K, and $15 M and $18. 33 M Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -10
Structure of Corporate Tax Rates (2 of 2) First $50 K > $50 K But Not > $75 K 15 % of Taxable Inc $7, 500 + 25% of Taxable Inc > $75 K But Not > $100 K 13, 750 + 34% of Taxable Inc > $75 K > $100 K But Not > $335 K $22, 250 + 39% of Taxable Inc > $100 K > $335 K > $10 M But Not > $15 M 34% of Taxable Inc 3. 4 M + 35% of Taxable Inc > $10 M > $15 M But Not > $5. 150 M + 38% > $15 M 1 -11 $18, 333 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Marginal, Average, and Effective Tax Rates for Taxpayers ® Marginal tax rate Tax rate applied to incremental amount of taxable inc that is added to tax base ® Average tax rate Total tax liability divided by amount of taxable income ® Effective tax rate Total tax liability divided by total economic income Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -12
Determination of Taxable Income and Tax Due Gross Income - Deductions for AGI - Deductions from AGI Taxable Income x Individual Tax Rate Gross Tax Due - Credits & Payments Tax or Refund Due Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -13
Other Types of Taxes ® State and local income taxes ® State and local franchise taxes ® Wealth transfer taxes Gift tax – levied on donor Estate tax – levied on decedent’s estate ¬Unified ® Other credit applies to both gift & estate tax types of taxes Prop. , excise, sales, & employment taxes Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -14
Criteria for a Tax Structure (1 of 4) ® Equity Vertical equity Horizontal equity ® Certainty Stable source of government revenues Amount of liability for taxpayers Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -15
Criteria for a Tax Structure (2 of 4) ® Convenience Easily assessed, collected, and administered ® Simplicity Should not be overly complex Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -16
Criteria for a Tax Structure (3 of 4) ® Economy Minimal compliance and administration costs Businesses spent $148 B to comply with federal tax law and $80 B to comply with state and local taxes Cost to individuals $111 B Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -17
Criteria for a Tax Structure (4 of 4) ® Objectives of Federal income tax law Economic objectives Encouragement of certain activities and industries Social objectives Income tax reform proposals ¬Simplified Income Tax Plan (SITP) ¬Growth and Investment Tax Plan (GITP) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -18
Economic Objectives ® Raise Revenues for Government Operations ® Stimulate Private Investment ® Reduce Unemployment ® Mitigate Effects on Inflation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -19
Entities in Federal Income Tax System (1 of 2) ® Taxpaying entities Individuals C corporations ¬Double taxation of C corp earnings ® Trusts Hybrid ¬May entity be taxpaying entity or flow-through Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -20
Entities in Federal Income Tax System (2 of 2) ® Flow-through Sole entities proprietorship ¬Also known as a Schedule C business Partnerships S Corporations LLC (Limited Liability Company) LLP (Limited Liability Partnership) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -21
Tax Law Sources (1 of 2) ® Legislative Internal Revenue Code Congressional Committee reports ® Executive (administrative) Income tax regulations Revenue Rulings Revenue Procedures Letter Rulings Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -22
Tax Law Sources (2 of 2) ® Judicial Court decisions ¬Trial courts ªDistrict Court, Tax Court, U. S. Court of Federal Claims ¬Appeals courts ªCircuit Courts ¬Supreme Court Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -23
Enactment of a Tax Law (1 of 4) 1. House of Representatives responsible for initiating new tax legislation ® 2. President may make proposal to Congress with studies on needed tax reform prepared by Treasury Referred to the House Ways and Means Committee (HW&MC) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -24
Enactment of a Tax Law (2 of 4) 3. Voted on by HW&MC ® 4. Voted on by House of Reps ® 5. Forwarded to House of Representatives for a vote if approved by HW&MC If approved, sent to Senate Finance Committee (SFC) Voted on by SFC If approved, sent to Senate for a vote ® Bill may be different than House version ® Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -25
Enactment of a Tax Law (3 of 4) Senate considers bill and may add amendments 7. Voted on by Senate 6. ® 8. If approved, sent to Joint Conference Committee (JCC) to reconcile bill JCC produces final bill ® Sent back to House and Senate to vote on final bill Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -26
Enactment of a Tax Law (4 of 4) If JCC bill approved, sent to President for approval or veto 10. Presidential veto may be overturned by 2/3 vote in both House & Senate 11. Committee reports prepared by staff of HW&MC, SFC, and JCC 9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -27
Administration of the Tax Law and Tax Practice Issues ® Organization of the IRS ® Enforcement procedures ® Selection of returns for audit ® Statute of limitations ® Interest ® Penalties ® Administrative appeal procedures Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -28
Selection of Returns for Audit (1 of 2) ® Tax system based on self assessment & voluntary compliance Enforcement necessary to maintain integrity of tax system Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -29
Selection of Returns for Audit (2 of 2) ® Discriminant Function System (DIF) DIF system generates “score” for return based on return for add’l tax revenue Returns manually screened by IRS ¬Decide which returns to examine further Less than 1% of all individual returns are selected for examination each year Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -30
Statute of Limitations ® General rule 3 years from later of the date tax return was actually filed or due date ® Six years if taxpayer omits items of gross income that in total exceed 25% ® Indefinite if fraudulent return filed or no return filed Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -31
Components of a Tax Practice ® Tax compliance and procedure ® Tax research ® Tax planning and consulting ® Financial planning Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -32
Computer Applications in Tax Practice ® Tax return preparation ® Tax planning applications E. g. , ® Tax project depreciation research applications RIA Checkpoint CCH Tax Research Network IRS web site Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -33
Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 1 -34
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