Slide 1AN INTRODUCTION TO TAXATION (1 of 2)AN INTRODUCTION TO TAXATION (2 of 2)History of TaxationManner in Which Tax Law Is Changed Or ModifiedRevenue SourcesTypes of Tax Rate StructuresStructure of Individual Income Tax Rates (1 of 2)Structure of Individual Income Tax Rates (2 of 2)Structure of Corporate Tax Rates (1 of 2)Structure of Corporate Tax Rates (2 of 2)Marginal, Average, and Effective Tax Rates for TaxpayersDetermination of Taxable Income and Tax DueOther Types of TaxesCriteria for a Tax Structure (1 of 2)Criteria for a Tax Structure (2 of 2)Objectives of Federal Income Tax LawEconomic ObjectivesEntities in Federal Income Tax System (1 of 2)Entities in Federal Income Tax System (2 of 2)Tax Law Sources (1 of 2)Tax Law Sources (2 of 2)Enactment of a Tax Law (1 of 4)Enactment of a Tax Law (2 of 4)Enactment of a Tax Law (3 of 4)Enactment of a Tax Law (4 of 4)Administration of the Tax Law and Tax Practice IssuesSelection of Returns for AuditStatute of LimitationsComponents of a Tax PracticeComputer Applications in Tax PracticeSlide 321-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.1-2AN INTRODUCTION TO AN INTRODUCTION TO TAXATIONTAXATION (1 of 2) (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©2007 Prentice Hall, Inc.1-3AN INTRODUCTION TO AN INTRODUCTION TO TAXATIONTAXATION (2 of 2) (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in tax practice©2007 Prentice Hall, Inc.1-4History of TaxationHistory of TaxationFirst Federal income tax in 1861Repealed after Civil WarReinstated in 1894Supreme Court ruled unconstitutional in 189516th Amendment on March 1, 1913Revenue acts prior to codification in 1939©2007 Prentice Hall, Inc.1-5Manner 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©2007 Prentice Hall, Inc.1-6Revenue SourcesRevenue Sources©2007 Prentice Hall, Inc.1-7Types of Tax Rate Types of Tax Rate StructuresStructures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©2007 Prentice Hall, Inc.1-8Structure 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©2007 Prentice Hall, Inc.1-9Structure 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©2007 Prentice Hall, Inc.1-10Structure 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©2007 Prentice Hall, Inc.1-11Structure of Corporate Tax Rates(2 of 2)First $50K 15 % of Taxable Inc> $50K But Not > $75K $7,500 + 25% of Taxable Inc> $75K But Not > $100K 13,750 + 34% of Taxable Inc > $75K> $100K But Not > $335K $22,250 + 39% of Taxable Inc > $100K> $335K 34% of Taxable Inc> $10M But Not > $15M 3.4M + 35% of Taxable Inc > $10M> $15M But Not > $18,333,333$5.150M + 38% > $15M> $18,333,333 35% of Taxable Inc©2007 Prentice Hall, Inc.1-12Marginal, 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©2007 Prentice Hall, Inc.1-13Determination of Taxable Income and Tax DueGross Income- Deductions for AGI= AGI- Deductions from AGI= Taxable Incomex Individual Tax Rate= Gross Tax Due- Credits & Payments= Tax or Refund Due©2007 Prentice Hall, Inc.1-14Other Types of TaxesOther Types of TaxesState and local income taxesState and local franchise taxesWealth transfer taxesEstate taxGift taxOther types of taxesProperty, excise, sales, & employment taxes©2007 Prentice Hall, Inc.1-15Criteria for a Tax Criteria for a Tax StructureStructure(1 of 2)(1 of 2)EquityVertical equityHorizontal equityCertaintyConvenienceSimplicity©2007 Prentice Hall, Inc.1-16Criteria for a Tax Criteria for a Tax StructureStructure(2 of 2)(2 of 2)EconomyBusinesses spent $102.5B to comply with federal tax law and $80B to comply with state and local taxesCost individuals $86.1B©2007 Prentice Hall, Inc.1-17Objectives of Federal Objectives of Federal Income Tax Law 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)©2007 Prentice Hall, Inc.1-18Economic ObjectivesRaise Revenues for Government OperationsStimulate Private InvestmentReduce UnemploymentMitigate Effects on Inflation©2007 Prentice Hall, Inc.1-19Entities in Federal Entities in Federal Income Tax SystemIncome Tax System (1 of 2) (1 of 2)Taxpaying entitiesIndividualsC corporationsDouble taxation of C corp earningsTrustsHybrid entityMay be taxpaying entity or flow-through©2007 Prentice Hall, Inc.1-20Entities in Federal Entities in Federal Income Tax SystemIncome Tax System (2 of 2) (2 of 2)Flow-through entitiesSole proprietorshipPartnershipsS CorporationsLLC (Limited Liability Company)LLP (Limited Liability Partnership©2007 Prentice Hall, Inc.1-21Tax Law SourcesTax Law Sources(1 of 2)(1 of 2)LegislativeInternal Revenue CodeCongressional Committee reportsExecutive (administrative)Income tax regulationsRevenue RulingsRevenue ProceduresLetter Rulings©2007 Prentice Hall, Inc.1-22Tax Law SourcesTax Law Sources(2 of 2)(2 of 2)JudicialCourt decisionsTrial courtsDistrict Court, Tax Court, U.S. Court of Federal ClaimsAppeals courtsCircuit