Basic Formula for Federal Income Tax

1
Basic Formula forFederal Income Tax

• Income xxx,xxx
• - Exclusions (xx,xxx)
• Gross income xxx,xxx
• - Less deductions (xx,xxx)
• Taxable income xxx,xxx
• X Tax rates xx
• Tax xx,xxx
• - Credits and prepayments xx,xxx
• Tax due or refund xx,xxx

2
State Local Income Tax

• Most states (43) have income tax
• Some cities (9) have an income tax
• Growing area in tax practice (SALT)

3
Sole Proprietorship

• One-person business
• Income taxed on individual income tax return
• Unlimited liability

4
C Corporations

• One or more owners
• Separate legal entity from owners
• Limited liability
• Tax-paying entity
• Possible double taxation

5
S Corporations

• For all legal purposes, they are corporations.
• For federal income tax purposes, the income is
  taxed directly to the owner

6
Partnership

• Two or more partners
• Partnership files separate return (Form 1065)
• Income is taxed pro rata to owners
• Unlimited liability

7
LLCs and LLPs

• One or more owners
• Files partnership return (usually)
• Income is taxed pro rata to owners
• Limited liability!!!!

8
Trusts

• Generally set up by donor to benefit a
  beneficiary
• Income taxed either to trust or beneficiary
  depending on facts
• Beyond the scope of Tax I

9
Dealings Between Entity and Owner(s)

• Formation issues
• Operations issues
• Liquidation issues

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Tax Planning Fundamentals

• Income
• Defer income
• Utilize exclusions
• Utilize lowest tax rates
• Deductions
• Maximize deductions
• Use against highest tax rates
• Credits

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Factors Affecting the Tax Law

• Economic considerations
• Social considerations
• Equity considerations
• Political considerations
• Influence of the IRS
• Influence of the courts

12
Tax Rates

• Use corporate rates of 15 on first 50,000 and
  25 rate on next 25,000
• Assuming X Corporation has 60,000 taxable
  income, (1) what is marginal tax rate and (2)
  what is average tax rate? (Note tax on 60,000
  taxable income is 15 X 50,000 25 X 10,000
  10,000)

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Problem 1-20

• Siennas marginal tax rate is 25
• Corporate bonds pay 8
• Municipal bonds pay 5
• Should Sienna invest in the municipal bond?
• Siennas after tax rate of 75 of 8 6. Dont
  invest in the muni bond
• Who should invest in the muni bond? Solve for
• (1 MTR) X .08 lt .05
• .08 -.08MTR lt .05
• .03 lt .08 MTR
• .375 lt MTR, or stated as MTR gt .375