Accounting John R. Dorocak Cal State University San Bernardino © Winter,l 2006, John R. Dorocak

This publication is distributed with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented herein. Therefore, we urge you to do additional research and ensure that you are fully informed.

Chapter 1 - Introduction to Various Taxes n Objectives of Course n Federal Income Tax Calculation - Tax formula (Individuals) n Federal Income Tax Calculation - Tax Returns (Individuals & other taxpayers)

5 Issues of Federal Income Tax n Is it income n Is it deductible n Is it ordinary income or capital gain n When is it income n To whom is it income

History of Federal Income Tax n 1895: Pollock v. Farmer’s Loan & Trust Co n 1913: 16th Amendment n Revenue Acts n Codes , 1954, 1986

Criteria to Judge Taxes n Adam Smith - equality, convenience, certainty, economy n fairness and simplicity (flatter rates & less deductions) n Internal consistency, policy objectives - see ”Factors” (policies) below n Revenue raising (revenue neutrality) (sources of federal revenues)

Various Taxes (other than federal income tax) n * Property Taxes: ad valorem; realty v. (fixtures) personalty; personal use v. business use n Excise taxes - state and federal n *Sales/Use Taxes - State n Value Added Tax (VAT) - potentially federal (or state)

n Death Taxes: estate (or inheritance), gift n *Federal estate tax - purpose, marital deduction, unified credit n states - estate tax or inheritance tax n *Gift taxes n Federal gift tax - 12,000 (06) (adjusted) per donee exclusion, marital deduction, unified credit, gift splitting n States - few have gift tax

Various Taxes (continued) n *State Income Taxes n Local Income Taxes n *Employment Taxes - FICA, FUTA

n IRS Role - Audits, Pronouncements n Sources of law - code; regs, rev ruls, other IRS pronouncements

General Tax Formula - Various Taxes: n Base x Rate = Tax rates: n Proportional, progressive, regressive, flat

Factors Shaping Federal Tax Law (policies) n Revenue needs n economic considerations (policies) - e.g., stimulate economy n social considerations (policies) - e.g., employee’s benefits n equity - i.e., fairness n Political - e.g., special interest n IRS n courts

Property Transactions n Gain Calculation: Amount Realized - Adjusted Basis = Gain (Chap 3)

Property Transactions n (Chaps 1,3,14,17) n Amount realized - Adjusted Basis = Gain or loss (Reg (c) old 1002) n Realization v. Recognition n PROPERTY Usually a capital asset tangible or intangible (e.g., stock, personal car, personal residence)

Property Transactions (continued) n Since property = cap asset, therefore gain = CG n LT v. ST CG (MT in 97 only)

1221 n Lists what is not capital asset (chap 3, chap 14) n inventory n a/r n 1231 assets n creative works n gov docs

1231 Asset (Chap 14) n Depreciable personalty used in T or B (e.g., machine) n Realty used in T or B n 1231 can be best of both worlds n capital gain (subject to 5 year look - back) n ordinary loss

Depreciation Recapture (Chap 14) n Overrides 1231 and capital losses rules (corps add 291 recapture - R/E) as if ( ) x 20%) n Subject to non recognition , 1033, 121, see Reg. (old) (Chap 13)

1245 Recapture n 1245 Recapture (recapture all deprec to extent of gain = OI) n Personalty n Commercial (non resid) R/E 81-86

1250 Recapture - R/E n Basically excess of accel’d over S/L (note commerc R/E above 1245) n (Chap 13, Chap 16)

LT Capital Gains Rates n 20% & 10% 97 only - if assets held at least 18 mo, beginning 7/29/97 (Also if held >12 mos & sold after 5/6/97 but before 7/29) 98 forward - If assets held >12 mo, beginning 1/1/98 n STCG - Regular rates

LTCG Rates (continued) n 18% n 8% If assets held 5 yrs, beginning after 12/31/2000 t/p >15%, acquire after 12/31/00 unless elect recognize gain on 1/1/01

LTCG Rates (continued) 28/25/15/10%; 25/15/10% n 28% & 25% 15% & 10% - collectibles n 25% & 15% & 10% Property - Portion possibly at 25%

Home Sales n Principal residence Sec 121 n 500,000 (250,000 single) exclusion - sales after 5/6/97

LT Capital Gains Rates (& Dividends ’03 – ‘08 n 5% (5/6/03 – 12/31/07) n 0% (1/1/08 – 12/31/08) n 15% (5/6/03 – 12/31/08) JGTRRA ‘03

LT Capital Gains Rates (+ Dividends ’09-‘10 n 5% n 15% TIPRA 06