Taxes in Our Lives PDF

I. Taxes in Our Lives (1.1, PPT Slides 8-11) i. Various types of taxes, such as income, sales, property, and excise taxes, come into play in many of the activities of individuals, businesses, nonprofit entities (like charities), and governments themselves. ii. Ultimately, all taxes are paid by indi...

I. Taxes in Our Lives (1.1, PPT Slides 8-11) i. Various types of taxes, such as income, sales, property, and excise taxes, come into play in many of the activities of individuals, businesses, nonprofit entities (like charities), and governments themselves. ii. Ultimately, all taxes are paid by individuals. The corporate income tax, for example, is paid directly by the corporation, but it really is paid indirectly by individuals in their capacity as customers, investors (owners), or employees; the taxes are passed along to individuals through higher prices for products and services, lower dividends, and/or lower wages. iii. Federal, state, and local elections often include initiatives that deal with taxation. Candidates running for office often have ideas on tax changes they would like to make if they are elected. a. The Relevance of Taxation to Accounting and Finance Professionals Instructor's Guide: Nellen/Cuccia/Persellin/Young, SWFT 2023 Volume 4: Essentials of Taxation: Individuals and Business Entities, 9780357720103; Chapter 1: Introduction to Taxation i. A large corporation may devote about 25% of its net income to pay income taxes, plus it is subject to employment taxes, property taxes, sales taxes, and various excise taxes. Corporations with international operations are subject to taxation in other countries. Small businesses also pay a variety of taxes that affect profits and cash flows. ii. Given its significance, taxation is a crucial topic for accounting and finance professionals. They must understand the various types of business taxes to assist effectively with: 1. Compliance: Ensure that the business files all tax returns and makes all tax payments on time. Mistakes and missed due dates will lead to penalties and interest expense. 2. Planning: Help a business to apply favorable tax rules, like deferring income and obtaining tax credits, to minimize tax liability (and maximize owner wealth). The time value of money concept also is important here, as is coordinating tax planning with other business goals to maximize earnings per share. 3. Financial reporting: Financial statements include a variety of tax information, including income tax expense on the income statement and deferred tax assets and liabilities on the balance sheet. Footnotes to the financial statements report various tax details, including the company's effective tax rate. 4. Environmental, Social, and Governance (ESG) reporting: A growing trend in corporate reporting is to address various business sustainability and responsibility matters and report environmental, social, and governance activities and impact. This reporting can include taxes paid in each country (part of "country-by-country reporting"), reconciliation between taxes paid and the statutory tax rate on financial statement profits, financial assistance received from governments via tax deductions and credits, and an explanation of the corporation's tax policy and strategy. 5. Controversy: Assist when the taxpayer interacts with a tax agency (like the IRS). The IRS and state and local tax agencies regularly audit tax returns to verify that taxes were properly computed and paid. 6. Cash management: Taxes must be paid on time to avoid penalties and interest. Income taxes must be estimated and paid quarterly and reconciled on the annual return. Other taxes may be due weekly, monthly, quarterly, or semiannually. Businesses must be sure they have the funds ready when the taxes are due and have procedures to track due dates. 7. Data analysis: With a majority, if not all, of a company's records maintained in digital form, there are opportunities to use this information to enhance profits, better understand the customer base, and improve and understand the information from a tax �-= �� � - � � --:- . �-_J.--:: . . ;: . . - _·' . . . . . = ---- . - �� - - - e en/Cuccia/Persellin/Young. SWFT 2023 Volume 4: Essentials of Taxation: Individuals and Business Entities. 9780357720103; Chapter 1: Introduction to Taxation perspective. Tax practitioners often need skills in data analysis and visualization to identify samples for both internal and external audits, find ways to identify the products and services subject to sales tax in different states, and extract tax data to help inform other business functions, such as where to locate a new sales office. The IRS and state tax agencies also use data analysis to help identify potential audit issues. 8. Tax advocacy: Taxpayers and tax practitioners can add tremendous value to the improvement and evolution of our tax laws by sharing their knowledge, experiences, and ideas with lawmakers and tax agencies. This input might take the form of comment letters, testimony before legislative committees (delivered in person or submitted for the record), or individual correspondence and meetings. iii. The level and depth of tax knowledge needed for any accounting or tax professional depends on his or her specific job. iv. It is essential to maintain a balanced perspective when working with tax systems. Tax considerations should not control decisions, but they are one of many factors to be considered. b. How to Study Taxation i. The goal of studying taxation is to be able to recognize issues (or transactions) that have tax implications and to try to understand the justification for the related tax rules. ii. Taxation is an important and exciting topic due to constant changes made by the three branches of the Federal government (as well as by state and local jurisdictions), the significance of taxes to the bottom line of a company and an individual's finances, and the effects of taxes on our economy and society. iii. One should focus on understanding the rules and the why(s) behind them rather than memorizing numerous rules and terms. Aiming for understanding, rather than memorization, will make your journey into the world of taxation interesting and meaningful, and it will prepare you well for dealing with taxation in your accounting or finance career. c. Individuals and Taxes i. The diagram on page 1-5 in the text illustrates the many ways individuals interact with taxes. II. The Structure of Tax Systems (1.2, PPT Slides 12-15) i. Most taxes have two components: a tax rate and a tax base (such as income, wages, value, or sales price). Tax liability is computed by multiplying these two components. Taxes vary by the structure of their rates, the base subject to tax, and whether reductions to the tax liability are allowed. Instructor's Guide: Nellen/Cuccia/Persellin/Young, SWFT 2023 Volume 4: Essentials ofTaxation: Individuals and Business Entities, 9780357720103; Chapter 1: Introduction to Taxation a. Tax Rates i. Tax rates can be progressive, proportional, or regressive. ii. A tax rate is progressive if the rate increases as the tax base increases. The Federal income tax is structured as a progressive tax. iii. Currently, the tax rates increase from 10% to 37% as taxable income (the tax base) increases. iv. A tax is proportional if the rate of tax is constant, regardless of the size of the tax base. State retail sales taxes are proportional. v. Regressive tax rates decrease as the tax base increases. 1. Federal employment taxes, such as FICA and FUTA, are regressive. 2. When the tax base and the taxpayer's ability to pay generally are positively correlated, many tax pundits view regressive tax rates as unfair. This is because the tax burden decreases as a percentage of the taxpayer's ability to pay. vi. The structure of tax rates only affectsthe rate of increase (i.e., progressive taxes increase at an increasing rate, proportional taxes increase at a constant rate, and regressive taxes increase at a decreasing rate). vii. The terms "progressive," "proportional," and "regressive" are most often used to describe tax rates in the design of tax systems or to describe the economic effect oftaxes on individuals. Effective tax rates (described below) are also used for this purpose. For tax compliance and planning purposes, a taxpayer's statutory, marginal, and average tax rates are determined and used. 1. The statutorytax rate is the tax rate (or rates) specified in the law. 2. The marginal tax rate is the tax rate applicable to the next dollar of income (if describing an income tax effect). This rate is relevant to let a taxpayer know the tax effect of, for example, earning a $1,000 bonus from one's employer. 3. The average tax rate is equal to the tax liability divided by taxable income. This rate can be useful in comparing taxpayers or a taxpayer's changed tax picture from one year to another. 4. The effective tax rate is equal to taxes.paid (often the tax liability) divided by the taxpayer's ability to pay (some income measure, like adjusted gross income or disposable income). This rate is often used by policy makers to measure the progressivity of a tax system. For financial reporting purposes, effective tax rate generally refers to total tax expense as a percentage of pretax book income (see text Section 3-3c). b. Tax Bases i. Most taxes are levied on one of four kinds of tax bases. 1. Transactions [including sales or purchases of goods and services and transfers of wealth (e.g., by gift or at death)]. �����-..----===--��----�-- - -� - �-,�- � -�. -- F � . ' ' . .. ' - -------- Instructor's Guide: Ne len/Cuccia/Persellin/Young. SWFT 2023 Volume 4: Essentials of Taxation: Individuals and Business Entities. 9780357720103; Chapter 1: Introduction to Taxation c. 2. Property or wealth (including ownership of specific kinds of property). 3. Privileges and rights (including the ability to do business as a corporation, the right to work in a certain profession, and the ability to move goods between countries). 4. Income on a gross or net-of-expenses basis. Incidence of Taxation i. A taxpayer's tax burden includes not only taxes paid directly (like income taxes) but also taxes paid indirectly. Often, the incidence of various taxes directly paid by businesses is on the final consumer of goods and services. ii. In evaluating tax systems, it is important to consider taxes paid both directly and indirectly in order to understand the effect of taxes on individuals. Ill. Types of Taxes (1.3, PPT Slides 16-47) i. Transaction taxes include Federal and state excise taxes and state and local general sales taxes, severance taxes, death taxes, and gift taxes. a. Taxes on the Production and Sale of Goods i. Federal Excise Taxes. Examples of Federal excise taxes include those imposed on tobacco, gasoline, telephone usage, air travel, and alcohol. l. Since World War 11, the role of excise taxes in financing the Federal government has steadily declined, falling from about 30-40% of revenues just prior to the war to about 2% now. 2. Currently, trucks, trailers, tires, liquor, tobacco, firearms, certain sporting equipment, medical devices, and air travel all are subject to Federal excise taxes. 3. Excise taxes extend beyond sales transactions; they also are levied on privileges and rights. 4. The bases used for Federal excise taxes are as diverse as the goods that are taxed (i.e., by the gallon, by the dose, by the price paid per ticket, etc.). Some are levied on producers, some on resellers, and some on consumers. 5. With the exception of Federal excise taxes on alcohol, tobacco, and firearms, Federal excise taxes are due at least quarterly, when the Federal excise tax return (Form 720) is filed. ii. State Excise Taxes. Many states levy excise taxes on the same items taxed by the Federal government. 1. Many states levy excise taxes on the same items taxed by the Federal government. For example, most states have excise taxes on gasoline, liquor, and tobacco. The tax on specific goods can vary dramatically among states. • �-- - � � . I 1-l ·,1. • \.:. ..- ' ' • "\ JI I • •Jy'' . •L" • .-,•. I .J • .,.4 I II • I -i .... 11:_ -.,I - 4. • , � • • • • • • - - -�· - .. -- -·�- - Instructor's Guide: Nellen/Cuccia/Persellin/Young, SWFT 2023 Volume 4: Essentials of Taxation: Individuals and Business Entities, 9780357720103; Chapter 1: Introduction to Taxation 2. Other goods and services subject to state and local excise taxes include admission to amusement facilities; hotel occupancy; rental of other facilities; and sales of playing cards and prepared foods. Some counties impose a tax on transfers of property that require recording of documents (such as real estate sales and sales of stock and securities). iii. Local Excise Taxes. Over the last few years, two types of excise taxes imposed at the local level have become increasingly popular: hotel occupancy tax and the rental car "surcharge." 1. They tax the visitor who cannot vote, and so are a political windfall and serve as a means of financing special projects that generate civic pride. 2. A few cities have created excise taxes that apply to digital transactions, like fees for streaming music and movies, app downloads, Uber and lyft fares, and Airbnb rentals. iv. General Sales Tax. The broad-based general sales tax is a major source of revenue for most state and local governments. It is used in all but five states (Alaska, Delaware, Montana, New Hampshire, and Oregon). 1. The sales tax typically employs a proportional tax rate and includes retail sales of tangible personal property (and occasionally personal services) in the base. 2. Some states exempt medicine and groceries from the base, and sometimes tax rates vary with the good being sold. 3. Local general sales taxes, over and above those levied by the state, are common. 4. For various reasons, some jurisdictions temporarily suspend the application of a general sales tax. The prevalent justification for these sales tax holidays is to reduce the cost of certain necessities, such as back-to-school items or hurricane preparedness items. v. Use Taxes. Every state that imposes a general sales tax also applies a use tax. The purpose of the use tax is to prevent the avoidance of the sales tax through the purchase of items in other states that have no sales taxes or that provide for lower rates. vi. Value Added Tax. The value added tax (VAT) is a variation of a sales tax and is levied at each stage of production on the value added by the producer. 1. A VAT is used by almost all countries aroundthe world; the United States is one of the few countries that does not use a VAT. 2. The tax typically serves as a major source of revenue for governments that use it. b. Employment Taxes i. Both Federal and state governments tax the salaries and wages paid to employees. ' "--: . -, ." . I .,.� �� -·---·� -------.-----�- - -.�-� lo;( • I I1