1. 1-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

2. 1-2 AN INTRODUCTION TO TAXATION (1 of 2)  History of taxation  Types of tax rate structures  Other types of taxes  Criteria for a tax structure  Objectives of Federal income tax law  Entities in Federal income tax system ©2011 Pearson Education, Inc. Publishing as Prentice Hall

3. 1-3 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

4. 1-4 History of Taxation  First Federal income tax in 1861  Repealed after Civil War  Reinstated in 1894  Supreme Court ruled unconstitutional in 1895  16 th Amendment on March 1, 1913  Revenue acts prior to codification in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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5. 1-5 Manner in Which 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

6. 1-6 Revenue Sources ©2011 Pearson Education, Inc. Publishing as Prentice Hall

7. 1-7 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

8. 1-8 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

9. 1-9 Structure of Individual Income Tax Rates (2 of 2)  Progressive  Rate increases as tax base increases  E.g., individual income tax  Proportional or flat tax  E.g., sales tax  Regressive  Rate decreases as tax base increases  E.g., FICA tax ©2011 Pearson Education, Inc. Publishing as Prentice Hall

10. 1-10 Structure of Corporate Tax Rates (1 of 2)  Stair-step pattern of progression  Tends to benefit small corporations  Benefit of graduated tax rates phased out between $100K and $335K, and $15M and $18.33M ©2011 Pearson Education, Inc. Publishing as Prentice Hall

11. 1-11 Structure of Corporate Tax Rates (2 of 2) First $50K15 % of Taxable Inc > $50K But Not > $75K$7,500 + 25% of Taxable Inc > $75K But Not > $100K13,750 + 34% of Taxable Inc > $75K > $100K But Not > $335K $22,250 + 39% of Taxable Inc > $100K > $335K34% of Taxable Inc > $10M But Not > $15M3.4M + 35% of Taxable Inc > $10M > $15M But Not > $18,333,333$5.150M + 38% > $15M > $18,333,33335% of Taxable Inc ©2011 Pearson Education, Inc. Publishing as Prentice Hall

12. 1-12 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

13. 1-13 Determination of Taxable Income and Tax Due Gross Income - Deductions for AGI = AGI - Deductions from AGI = Taxable Income x Individual Tax Rate = Gross Tax Due - Credits & Payments = Tax or Refund Due ©2011 Pearson Education, Inc. Publishing as Prentice Hall

14. 1-14 Other Types of Taxes  State and local income taxes  State and local franchise taxes  Wealth transfer taxes  Estate tax - Repealed in 2010; likely to be reinstated at 2009 rates  Gift tax  Other types of taxes  Prop., excise, sales, & employment taxes ©2011 Pearson Education, Inc. Publishing as Prentice Hall

15. 1-15 Criteria for a Tax Structure (1 of 3)  Equity  Vertical equity  Horizontal equity  Certainty  Stable source of gov’t revenues  Amount of liability for taxpayers ©2011 Pearson Education, Inc. Publishing as Prentice Hall

16. 1-16 Criteria for a Tax Structure (2 of 3)  Convenience  Easily assessed, collected, and administered  Simplicity  Should not be overly complex ©2011 Pearson Education, Inc. Publishing as Prentice Hall

17. 1-17 Criteria for a Tax Structure (3 of 3)  Economy  Minimal compliance and administration costs  Businesses spent $148B to comply with federal tax law and $80B to comply with state and local taxes  Cost to individuals $111B ©2011 Pearson Education, Inc. Publishing as Prentice Hall

18. 1-18 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) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

19. 1-19 Economic Objectives  Raise Revenues for Government Operations  Stimulate Private Investment  Reduce Unemployment  Mitigate Effects on Inflation ©2011 Pearson Education, Inc. Publishing as Prentice Hall

20. 1-20 Entities in Federal Income Tax System (1 of 2)  Taxpaying entities  Individuals  C corporations  Double taxation of C corp earnings  Trusts  Hybrid entity  May be taxpaying entity or flow-through ©2011 Pearson Education, Inc. Publishing as Prentice Hall

21. 1-21 Entities in Federal Income Tax System (2 of 2)  Flow-through entities  Sole proprietorship  Also known as a Schedule C business  Partnerships  S Corporations  LLC (Limited Liability Company)  LLP (Limited Liability Partnership) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

22. 1-22 Tax Law Sources (1 of 2)  Legislative  Internal Revenue Code  Congressional Committee reports  Executive (administrative)  Income tax regulations  Revenue Rulings  Revenue Procedures  Letter Rulings ©2011 Pearson Education, Inc. Publishing as Prentice Hall

23. 1-23 Tax Law Sources (2 of 2)  Judicial  Court decisions  Trial courts  District Court, Tax Court, U.S. Court of Federal Claims  Appeals courts  Circuit Courts  Supreme Court ©2011 Pearson Education, Inc. Publishing as Prentice Hall

24. 1-24 Enactment of a Tax Law (1 of 4) 1. House of Representatives responsible for initiating new tax legislation  President may make proposal to Congress with studies on needed tax reform prepared by Treasury 2. Referred to the House Ways and Means Committee (HW&MC) ©2011 Pearson Education, Inc. Publishing as Prentice Hall

25. 1-25 Enactment of a Tax Law (2 of 4) 3. Voted on by HW&MC  Forwarded to House of Representatives for a vote if approved by HW&MC 4. Voted on by House of Reps  If approved, sent to Senate Finance Committee (SFC) 5. Voted on by SFC  If approved, sent to Senate for a vote  Bill may be different than House version ©2011 Pearson Education, Inc. Publishing as Prentice Hall

26. 1-26 Enactment of a Tax Law (3 of 4) 6. Senate considers bill and may add amendments 7. Voted on by Senate  If approved, sent to Joint Conference Committee (JCC) to reconcile bill 8. JCC produces final bill  Sent back to House and Senate to vote on final bill ©2011 Pearson Education, Inc. Publishing as Prentice Hall

27. 1-27 Enactment of a Tax Law (4 of 4) 9. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

28. 1-28 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

29. 1-29 Selection of Returns for Audit  Self assessment & voluntary compliance  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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

30. 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

31. 1-31 Components of a Tax Practice  Tax compliance and procedure  Tax research  Tax planning and consulting  Financial planning ©2011 Pearson Education, Inc. Publishing as Prentice Hall

32. 1-32 Computer Applications in Tax Practice  Tax return preparation  Tax planning applications  E.g., project depreciation  Tax research applications  RIA Checkpoint  CCH Tax Research Network  IRS web site ©2011 Pearson Education, Inc. Publishing as Prentice Hall

33. Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com 1-33 ©2011 Pearson Education, Inc. Publishing as Prentice Hall