Chapter 1 - Tax

Nexus

A legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. For example, if you sell goods or services in Los Angeles, you must file and pay California state taxes.

Use Taxes

A sales tax that is collectible by the seller where the purchaser is domiciled in a different state.

C Corporations

A separate taxable entity subject to the rules of Subchapter C of the Code. This business form may create a double taxation effect relative to its shareholders. The entity is subject to the regular corporate tax and a number of penalty taxes at the Federal level.

S Corporations

A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses. No more than 75 shareholders.

Sales Taxes

A state or local-level tax on the retail sale of specified property. Generally, the purchaser pays the tax, but the seller collects it, as an agent for the government. Various taxing jurisdictions allow exemptions for purchases of specific items, including food, services, and manufacturing equipment. If the purchaser and seller are in different states, use tax usually applies.

Inheritance Tax

A tax imposed on the right to receive property from a decedent. Thus, theoretically, an inheritance tax is imposed on the heir. The Federal estate tax is imposed on the estate.

Estate Tax

A tax imposed on the right to transfer property by death. Thus, an estate tax is levied on the decedent's estate and not on the heir receiving the property.

Gift Tax

A tax imposed on the transfer of property by gift. The tax is imposed upon the donor of a gift and is based on the fair market value of the property on the date of the gift.

Ad Valorem Taxes

A tax imposed on the value of property. The most common ad valorem tax is that imposed by states, counties, and cities on real estate. Ad valorem taxes can be imposed on personal property as well.

Occupational Taxes

A tax imposed on various trades or businesses. A license fee that enables a taxpayer to engage in a particular occupation.

Franchise Tax

A tax levied on the right to do business in a state as a corporation. Although income considerations may come into play, the tax usually is based on the capitalization of the corporation.

Excise Taxes

A tax on the manufacture, sale, or use of goods; on the carrying on of an occupation or activity; or on the transfer of property. Thus, the Federal estate and gift taxes are, theoretically, excise taxes.

Deferred Tax Liability

An item created on an enterprise's balance sheet by a temporary book-tax difference, such that a tax benefit is recognized earlier for tax purposes than it is in the financial accounting records.

Deferred Tax Asset

An item created on an enterprise's balance sheet by a temporary book-tax difference, such that a tax is not recognized until a later date, although it already has been reported in the financial statements.

Wherewithal To Pay

This concept recognizes the inequity of taxing a transaction when the taxpayer lacks the means with which to pay the tax. Under it, there is a correlation between the imposition of the tax and ability to pay the tax. It is particularly suited to situations in which the taxpayer's economic position has not changed significantly as a result of the transaction.

International Financial Reporting Standards (IFRS)

Produced by the International Accounting Standards Board (IASB), guidelines developed since 2001 as to revenue recognition, accounting for business combinations, and a conceptual framework for financial reporting. IFRS provisions are designed so that they can be used by all entities, regardless of where they are based or conduct business. IFRS have gained widespread acceptance throughout the world.

Employment Taxes

Taxes that an employer must pay on account of its employees. Employment taxes include FICA and FUTA. Employment Taxes are paid to the IRS in addition to income tax withholdings at specified intervals. Such taxes can be levied on the employees, the employer, or both.

Flow-Through Entity

The entity is a tax reporter rather than a taxpayer. The owners are subject to tax. Examples are partnerships, S-Corporations, and Limited Liability Companies.

Effective Tax Rate

The financial statements for an entity include several footnotes, one of which reconciles the expected (statutory) income tax rate (35% for a C Corporation) with the effective tax rate (total tax expense as a percentage of book income).

Tax Evasion

The reduction of taxes by the use of subterfuge or fraud or other nonlegal means. For example, a cash basis taxpayer tries to increase his or her charitable contribution deduction by prepaying next year's church pledge with a predated check issued in the following year.

Generally Accepted Accounting Principles (GAAP)

Guidelines relating to how to construct the financial statements of enterprises doing business in the United States. Promulgated chiefly by the Financial Accounting Standards Board (FASB).

Proprietorship

A business entity for which there is a single owner. The net profit of the entity is reported on the owner's Federal income tax return.

Value Added Tax (VAT)

A national sales tax that taxes the increment in value as goods move through the production process. A VAT is much used in other countries by has not yet been incorporated as part of the US Federal tax structure.

FICA Tax

An abbreviation that stands for Federal Insurance Contributions Act, commonly referred to as the Social Security tax. The FICA tax is comprised of the Social Security tax and Medicare tax and is imposed on both employees and employers. The employer is responsible for withholding from the employee's wages the Social Security tax at a rate of 6.2% ib a maximum wage base and the Medicare tax at a rate of 1.45%. The maximum Social Security wage base for 2016 is $118,500.

FUTA Tax

An employment tax levied on employers. Jointly administered by the Federal and state governments, the tax provides funding for unemployment benefits. FUTA applies at a rate of 6.0 percent on the first $7,000 of covered wages paid during the year for each employee in 2016. The Federal government allows a credit for FUTA paid 5.4 percent of the covered wages.

Financial Accounting Standard Board (FASB)

Board that helps create the GAAP.

Realty

Real Estate

Tax Avoidance

The minimization of one's tax liability by taking advantage of legally available tax planning opportunities. Tax avoidance can be contrasted with tax evasion, which entails the reduction of tax liability by illegal means.