Income and Business Taxation PDF

A. Corporate Taxation before the losses can be deducted. are collected by the government profit earned by a corporation may be left within as a source of income. It is based on taxable income the corporation, allowi...

A. Corporate Taxation before the losses can be deducted. are collected by the government profit earned by a corporation may be left within as a source of income. It is based on taxable income the corporation, allowing for tax planning and after expenses have been deducted. potential future tax advantages. Corporations are permitted to reduce taxable The corporate tax rate is a tax levied on a corporation's income by certain necessary and ordinary business profits, collected by a government as a source of expenditures. All current expenses required for income. It applies to a company's income, which is the operation of the business are fully tax- revenue minus expenses. deductible. Investments and real estate purchased % States with the intent of generating income for the may also impose a separate corporate tax on business are also deductible. companies. Companies often seek to lower their Corporations are permitted to reduce taxable corporate tax obligations through taking advantage of income by certain necessary and ordinary business deductions, loopholes, subsidies, and other practices. expenditures. All current expenses required for the operation of the business are fully tax- B. Individual Taxation deductible. Investments and real estate purchased with the intent of generating income for the business are also deductible. Also referred to as personal income tax. This type of income tax is levied on an individual’s wages, salaries, and other types of income. A central issue relating to corporate taxation is the This tax is usually a tax that the state imposes. concept of double taxation. Certain corporations are Because of exemptions, deductions, and credits, taxed on the taxable income of the company. If this net most individuals do not pay taxes on all of their income is distributed to shareholders, these individuals income.While a deduction can lower your taxable are forced to pay individual income taxes on the income and the tax rate used to calculate your tax, dividends received. Instead, a business may register as a tax credit reduces your income tax obligation. an S corporation and have all income pass-through to Tax credits help reduce the taxpayer’s tax the business owners. As S corporation does not pay obligation or amount owed. They were created corporate tax, as all taxes are paid through individual primarily for middle- income and lower-income tax returns. households. Paying corporate taxes can be more beneficial for The percent of your income that is taxed depends on business owners than paying additional individual how much you earn and your filing status. In theory, the income tax. more you earn, the more you pay. Corporate tax returns deduct medical insurance for families as well as fringe benefits, including retirement plans and tax-deferred trusts. It is To calculate income tax, you’ll need to add up all sources easier for a corporation to deduct losses, too. of taxable income earned in a tax year. The next step A corporation may deduct the entire amount of is calculating your adjusted gross income (AGI). Once you losses, while a sole proprietor must provide have done this, subtract any deductions for which you evidence regarding the intent to earn a profit are eligible from your AGI. All taxpayers pay federal income tax. Depending on There are many ways to reduce taxes that are not where you live, you may have to pay state and local only available to high-income earners but to all earners. income taxes, too. The U.S. has a progressive income These include contributing to retirement accounts, tax system, which means that higher-income earners contributing to health savings accounts (HSAs), investing pay a higher tax rate than those with lower incomes. in stocks with qualified dividends, buying municipal bonds, Most taxpayers do not pay taxes on all of their and planning where you live based on favorable tax income, thanks to exemptions and deductions. treatments of a specific state. C. Tax Planning and Optimization is the analysis of a financial Tax planning involves utilizing strategies that lower the situation or plan to ensure that all elements work taxes that you need to pay. There are many legal ways together to allow you to pay the lowest taxes in which to do this, such as utilizing retirement plans, possible. holding on to investments for more than a year, and A plan that minimizes how much you pay in taxes offsetting capital gains with capital losses. is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan. Reduction of tax liability and FINANCIAL ANALYSIS AND maximizing the ability to contribute to retirement REPORTING plans are crucial for success. Tax planning covers several considerations. A. Financial Statements Analysis Considerations include timing of income, size, and timing of purchases, and planning for other It is the process of analyzing a company’s expenditures. Also, the selection of investments financial statements for decision-making and types of retirement plans must complement purposes. External stakeholders use it to the tax filing status and deductions to create the understand the overall health of an organization best possible outcome. and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing finances. is another form of tax planning or management relating to investments. It is helpful because it can use a portfolio's losses to The financial statements of a company record offset overall capital gains. According to the IRS, important financial data on every aspect of a short and long-term capital losses must first be business’s activities. As such, they can be used to offset capital gains of the same type. evaluated on the basis of past, current, and In other words, long-term losses offset long-term projected performance. gains before offsetting short-term gains. Short- are centered around term capital gains, or earnings from assets owned generally accepted accounting principles (GAAP) for less than one year, are taxed at ordinary in the United States. These principles require a income rates. company to create and maintain : the balance sheet, the income statement, and the cash flow statement. Some of the most basic tax planning strategies include Public companies have stricter standards for reducing your overall income, such as by contributing to financial statement reporting. Public companies retirement plans, making tax deductions, and taking must follow GAAP, which requires accrual advantage of tax credits. accounting.  Private companies have greater flexibility in their company’s expense arrangements and the debt financial statement preparation and have the capital it is paying off; and shareholder equity option to use either accrual or cash accounting. includes details on equity capital investments and Several techniques are commonly used as part retained earnings from periodic net income. of financial statement analysis The balance sheet must balance assets and are horizontal liabilities to equal shareholder equity. This figure is analysis, vertical analysis, and ratio analysis. considered a company’s book value and serves compares data as an important performance metric that horizontally, by analyzing values of line increases or decreases with the financial items across two or more years. It activities of a company. involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends across different time periods. breaks down the revenue that a company earns looks at the vertical against the expenses involved in its business to effects that line items have on other provide a bottom line, meaning the net profit or parts of the business and the loss. business’s proportions. It compares The income statement is broken into three parts items on a financial statement in that help to analyze business efficiency at three relation to each other. For instance, an different points. It begins with revenue and the expense item could be expressed as a direct costs associated with revenue to identify percentage of company sales. gross profit. It then moves to operating profit, uses important ratio which subtracts indirect expenses like marketing costs, general costs, and depreciation. Finally, metrics to calculate statistical after deducting interest and taxes, the net relationships. It is a central part of income is reached. fundamental equity analysis, compares line-item data. Price-to-earnings (P/E) Basic analysis of the income statement usually ratios, earnings per share, or dividend involves the calculation of gross profit margin, yield are examples of ratio analysis. operating profit margin, and net profit margin, which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations. Companies use the balance sheet, income statement, and cash flow statement to manage the operations of their business and to provide transparency to their stakeholders. All three statements are The cash flow statement provides an overview interconnected and create different views of a of the company’s cash flows from operating company’s activities and performance. activities, investing activities, and financing activities. Net income is carried over to the cash flow statement, where it is included as the top line a report of a company’s financial worth in terms item for operating activities. Like its title, of book value. It is broken into three parts to investing activities include cash flows involved include a company’s assets, liabilities, and with firm-wide investments. The financing shareholder equity. activities section includes cash flow from both Short-term assets such as cash and accounts debt and equity financing. The bottom line shows receivable can tell a lot about a company’s how much cash a company has available. operational efficiency; liabilities include the  to convert its inventory into sales. - Companies and analysts also use free debt to assets - It is a leverage ratio that defines cash flow statements and other valuation statements how much debt a company carries compared to to analyze the value of a company. Free cash flow the value of the assets it owns. statements arrive at a net present value by debt to equity - Lenders have priority over equity discounting the free cash flow that a company is investors in an enterprise’s assets. The more estimated to generate over time. Private companies equity there is, the more likely a lender will be may keep a valuation statement as they progress repaid. toward potentially going public. gross profit margin – How much profit is earned Financial statements are maintained by from your products without considering indirect companies daily and used internally for business costs. Small changes in gross margin can management. In general, both internal and significantly affect profitability. external stakeholders use the same corporate operating profit margin - measures how much finance methodologies for maintaining business profit a company makes on a dollar of sales after activities and evaluating overall financial paying for variable costs of production, such as performance. wages and raw materials, but before paying When doing comprehensive financial statement interest or tax analysis, analysts typically use multiple years of net profit margin- This ratio measures your data to facilitate horizontal analysis. Each financial ability to cover all operating costs including statement is also analyzed with vertical analysis indirect costs to understand how different categories of the tax ratio efficiency – show how much income statement are influencing results. Finally, ratio an individual retains. The higher the proportion, analysis can be used to isolate some the more tax efficient a taxpayer is. performance metrics in each statement and interest coverage - measures how well a firm bring together data points across statements can pay the interest due on outstanding debt. collectively. Below is a breakdown of some of the most common cash and earnings before interest taxes, ratio metrics: depreciation, and amortization (EBITDA) - an alternate measure of profitability to net income. asset turnover – How efficiently your business EBITDA attempts to represent the cash profit generates sales on each dollar of assets. An generated by the company's operations. increasing ratio indicates you are using your These metrics may be shown on a per-share basis. assets more productively. quick ratio – This is often referred to as the return on assets (ROA) - Measures your ability “acid test” because it only looks at the company’s to turn assets into profit. This is a very useful most liquid assets only (excludes inventory) that measure of comparison within an industry. A low can be quickly converted to cash). ratio compared to industry may mean that your receivables turnover – The higher the turnover, competitors have found a way to operate more the shorter the time between sales and efficiently. collecting cash. return on equity (ROE) - Rate of return on days to sales - measurement of the average investment by shareholders. This is one of the number of days or time required for a business most important ratios to investors.  DuPont analysis - an alternate way to calculate and deconstruct ROE (Return on Equity) in order to get a better understanding of the underlying factors behind a company’s ROE. The simplest Dupont formula, the three-step method, is done by simply multiplying the three determinants of three main components–net profit margin, total asset turnover, and equity multiplier–to determine the ROE. The main point of financial statement analysis is to evaluate a company’s performance or value through a company’s balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical, or ratio analysis, investors may develop a more nuanced picture of a company’s financial profile. An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it generates profits and shareholder value. For instance, gross profit margin will show the difference between revenues and the cost of goods sold. If the At the same time, the analyst may observe that the gross profit margin has been increasing over nine fiscal periods, applying a horizontal analysis to the company’s operating trends.