Accountancy 200 Fundamentals of Accounting

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Accountancy 200Fundamentals of Accounting

• INTRODUCTION TO TAXATION

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Structure of Taxes
Taxes have two components, a tax rate and a tax
base, where the entitys tax liability is the
product of the two. For example, in Champaign
County the sales tax rate is 7.25 and the sales
tax base is the purchase price of taxable goods
and services. If I were to purchase a shirt at
Bergners for 45.00, the sales tax on that
purchase would be
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Tax Rates

• Proportional
• Progressive
• Regressive

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Tax Bases

• Transactions
• Property or wealth
• Privileges and rights
• Income

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Taxes and Taxing Authorities
Taxes involving the same base can differ both in
type of tax and tax rate between different taxing
authorities. For example, in Illinois the license
fee for personal auto-mobiles is 48 per year for
all cars, regardless of make, model and age.
In contrast, Arizonas vehicle license fee is
3.35 of the cars retail value. Why do you
think these two states differ in their approach
to vehicle license taxation?
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Income Taxation of Business Entities

• Proprietorships
• Partnerships
• Corporations
• C corporations
• S corporations

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Income Taxation of Business Entities
Pretax accounting income (GAAP)
/ Permanent differences
Loss carryforwards
/ Temporary differences
Taxable income (IRS Rules)
x Applicable tax rates
Taxes payable
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Income Taxation of Individuals
Income (broadly defined)
Exclusions
Gross income
Certain business investment deductions
Adjusted gross income
The greater of certain personal and employee
deductions (itemized deductions) or the standard
deduction
Taxable income
x Applicable tax rates
Income tax
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Tax Planning
The objective of tax planning is for the entity
to minimize its tax liabilities. Tax
avoidance Tax evasion
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Problem 22
Sienna, Inc., faces a marginal tax rate of 25,
an average tax rate of 17.5, and an effective
marginal tax rate of 16.8. Sienna is
considering investing in Kiowa County bonds,
which currently pay a 5 return. Equivalent
taxable bonds are paying an 8 return.
What is the implicit tax rate on the Kiowa County
bonds?
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Problem 22
Are the Kiowa County bonds a good investment for
Sienna? Why or why not?