1. Business Taxation Anderson: The Corporate Income Tax

2. Copyright © by Houghton Mifflin Company. All rights reserved. 2 Introduction Organizing a business. Rationale for corporate taxation. Effects of profit taxation.

3. Copyright © by Houghton Mifflin Company. All rights reserved. 3 Organizing a Business Legal form for business: Sole proprietorship. Partnership. Corporation. Issue of incorporation involves limited liability and taxation. Hybrid forms of business include: Limited liability partnerships (LLP). Professional corporations (PC).

4. Copyright © by Houghton Mifflin Company. All rights reserved. 4 Rationale for Corporate Taxation Under a classical system, corporate income taxation is based on a benefits-received justification. The corporation is a legal entity separate and distinct from any person or group of persons involved. It receives benefits afforded by that legal status. Taxation is justified on that basis.

5. Copyright © by Houghton Mifflin Company. All rights reserved. 5 Issues Arising Tax arbitrage. Differences between the personal income tax rate, corporate income tax rate, and the capital gains tax rate provide opportunities to arbitrage. Double taxation. Dividend income is taxed twice, at the corporate level and again at the individual level.

6. Copyright © by Houghton Mifflin Company. All rights reserved. 6 Effects of a Profits Tax A tax on economic profit would be perfectly efficient, since it would not change firm behavior. But, the corporate income tax is not a tax on economic profit.

7. Copyright © by Houghton Mifflin Company. All rights reserved. 7 Tax Base and Rates Net income—the tax base. Profits: economic and accounting. Corporate income tax rates

8. Copyright © by Houghton Mifflin Company. All rights reserved. 8 Net Income—the Tax Base Gross profit = gross receipts - cost of goods sold. Total income = gross profit - dividends - interest - gross rents - gross royalties - capital gain net income + other income.

9. Copyright © by Houghton Mifflin Company. All rights reserved. 9 Net Income—the Tax Base, [continued] Taxable income = Total income - Total deductions. Total deductions = compensation of officers + salaries and wages + repairs and maintenance + bad debts + rents + taxes and licenses + interest paid + charitable contributions + depreciation + depletion + advertising + pension and profit-sharing plans + employee benefit programs + other deductions + NOL deduction.

10. Copyright © by Houghton Mifflin Company. All rights reserved. 10 Figure 14.1: U.S. Corporate Income Tax Return – Form 1120

11. Copyright © by Houghton Mifflin Company. All rights reserved. 11 Profits: Economic and Accounting Accounting profit is the difference between revenue generated by sales and costs incurred for inputs. Economic profit is the difference between revenue and cost, including the opportunity cost of capital.

12. Copyright © by Houghton Mifflin Company. All rights reserved. 12 Figure 14.2: Competitive Firm Profits

13. Copyright © by Houghton Mifflin Company. All rights reserved. 13 Figure 14.3: Monopolist Profit

14. Copyright © by Houghton Mifflin Company. All rights reserved. 14 Corporate Income Tax Rates Corporate income tax rates in the U.S. are progressive, depending upon the net income of the corporation. Most corporations pay a rate of 35%.

15. Copyright © by Houghton Mifflin Company. All rights reserved. 15