R1 M3, Chapter 1, Chapter 23: State and local taxes, ACCT 4400 - SALT #2 Apportionment, Multijurisdictional Tax Issues, Uses of Local/State Taxes, ACCT 570 - Ch 12: State & Local Taxes, 4400, Multi-Jurisdictional Tax, State and Local Taxation, Tax La...

Where are charitable contributions reported as itemized deductions?

Schedule A

Where is personal portion of SALT reported as itemized deduction?

Schedule A

Where is business income recorded on tax return?

Schedule C or C-EZ

Rental income

Schedule E passive activity

Farming income reported on

Schedule F

Farm income averaging is reported on

Schedule J

long term contract exemptions

Small contractors and home construction contractors

Farm income averaging

can spread out income over past 3 years to avoid higher tax bracket

End date for long term contracts

date on which contract is complete or date that at least 95% of total estimated costs incurred

Real Property Tax

levied on individuals and businesses that own real property (land and buildings) an dis assed on the fair market value of the property

Wealth Transfer Taxes

levied when all or part of an individual's wealth is transferred to another person

Regressive Tax System

taxpayers pay a decreasing proportion of their income as their income increase - as the taxzery's income goes from one bracket to another, his or her average tax on total income decreases as does the marginal tax rate

Who pays an inheritance tax

the estate normally pays but the tax paid reduces the value of the property transferred to the heir

Nexus

type and degree of connection between a business and a state necessary for the state to impose a tax

Gift Tax

wealth transfer tax that is imposed on a donor who makes a gratuitous lifetime transfer of property - to avoid double taxation, the recipient is not subject to income tax on gifted or inherited property

Source Principle

whenever a business has an economic connection to a state (derives income from assets or activities located within a state), it has the right to tax the business

Proportional "Flat" Tax System

would require all income to be taxed the same regardless of the amount of type of the taxpayer's income - marginal and average tax rates would be identical over all ranges of income

Business meal and entertainment expense

50% Deductible

FICA stands for

Federal Insurance Contributions Act - employment taxes, federal and state unemployment taxes

Depreciation of business assets

Deductible

Employee benefits

Deductible

Interest expense on business loans

Deductible

Legal and professional services

Deductible

Salaries and commissions paid to others

Deductible

Most common form of a consumption tax in the U.S.

sales tax

Residency Principle

state in which a corporation is organized has the right to impose an income tax on that corporation

Most common example of a proportional tax

state sales tax - fixed percentage of the amount spent

Inheritance tax

- levied in leu of estate taxes - based on a person's right to receive property upon the death of another

Other forms of wealth taxes (beside real property tax)

- personal property tax - tangible property tax - intangible property tax

Computation of income taxes use 3 factors typically:

- sales - payroll costs - tangible property

Tax Expenditures

- tax breaks - result in a reduction in the revenue that would be collected under a more comprehensive income tax

Farming income accrual basis gross profit calculation

Net sales + End inv - Beg inv - inv purchases

Export Duties

- taxes levied on goods that are leaving the country of origin - discourage producers from selling their goods abroad by making them more expensive

Import Duties

- taxes on goods brought into a country and levied but eh destination country - encourages the purchase of goods at home by making imported goods more expensive

2 major problems related to wealth taxes have lessened government reliance on them as a source of revenue:

- the difficulty in establishing fair market value annually - the taxpayer's ability to "hide" personal property

Internal Revenue Code

- where income tax laws are codified - amendments and revisions can be made to specific sections of the code

The only regressive taxes that taxpayers are subject to at the federal level are....

- FICA - unemployment taxes

2 components of the FICA tax

- Social Security - Medicare

Turnover tax

- consumption tax - sales tax levied at each step of the business chain (both wholesale and retail) but with no rebates or credits for prior taxes paid

Progressive Tax System

- current federal income tax system - one in which the tax rates increase as income increases - based on belief that taxpayers with higher levels of income should pay a greater portion of the taxes necessary to support the government

2 Types of Income are subject to lower tax rates:

- dividend income - long-term capital gains

Tax expenditures can take the form of:

- exclusions - deductions - credits - preferential rates for specific activities

Excise Tax

- form of sales tax - only sales tax levied by the federal government - generally levied on taxable goods for which there is a low elasticity of demand or on goods whose use the government wishes to discourage (sin taxes_

VAT different from sales tax:

- generally included directly in the selling price at the consumer level - VAT not levied on goods exported to other countries

Franchise Tax

- imposed in place of the income tax - excise tax based on the right to do business or own property in the state

Value-Added Tax (VAT)

- in most developed countries of the world besides the U.S. - type of sales tax that is added to a product or service based on the value added to specific points int eh production or service process

2 reasons materials are brought into the country/for tariff:

1. a foreign country is selling goods to the purchasers in the destination country at prices that are believed to be below production costs in the country of origin; the foreign business may be attempting to capture a market and put the local operations out of business 2. a local business's operating costs are higher than those costs for the same product produced int eh foreign jurisdiction

Tax expenditures can be paid for in 3 ways:

1. reducing spending 2. adding to the budget deficit 3. raising other tax revenue to offset the cost of the tax expenditures

Costs required to be capitalized

1.Direct materials 2.Direct labor 3.Applicable indirect costs

Uniform capitalization rules apply to

1.Produced for use 2.Produced for sale 3.Acquired for resale

Occupancy requirements for residence to be treated as personal/rental residence

1.Rented for at least 15 days 2.Used for personal purposed for the greater of at least 15 days or 10% of rental days

"unique" rules for personal property contracts

1.must be completed withing 1 year 2.must be for manufacture of unique item

Residence rented for fewer than 15 days

1.treated as personal residence 2.excluded from income 3.mortgage interest (first or second home) and real estate taxes can be itemized 4.Depreciation, utilities, and repairs not deductible

NOL Carryover

2 year carryback 20 year carryforward

Expense treatment for residence rented for 15 or more days

Prorated between personal and rental use

Who proposed the concept of the 4 canons of taxation?

Adam Smith

Farming income inventory is used and maintained when using

Accrual basis

Real or tangible property acquired by the taxpayer for resale

Acquired for resale

Do most farmers use cash basis or accrual basis?

Cash

Farming income inventory is expensed when using

Cash basis

Bad debts actually written off for an accrual basis taxpayer

Deductible

Business SALT paid

Deductible

Business portion of automobile expense

Deductible

COGS

Deductible

Cash basis start date for long term contracts

Date on which contractor incurs costs

Change in accounting method for long term contracts

IRS permission required

Accrual basis start date for long term contracts

Later of date on which contractor incurs costs or date contractor has incurred at least 5% of total estimated costs

Is rental income from a residence rented for fewer than 15 days included in income?

No

Bad debt expense of cash basis taxpayer

Nondeductible

Charitable contributions

Nondeductible

Federal income tax

Nondeductible

Personal portion of Health insurance of sole proprietor

Nondeductible

Personal portion of SALT

Nondeductible

Personal portion of automobile, travel, and vacation expense

Nondeductible

Personal portion of interest expense

Nondeductible

Personal portion of meals and entertainment expense

Nondeductible

Salaries paid to sole proprietor

Nondeductible

Income recognition method for tax for nonexempt long term contracts

Percentage-of-completion

Costs not required to be capitalized

Period expense

Real or tangible personal property produced by taxpayer for sale to his or her customers

Produced for sale

Real or tangible personal property produced by taxpayer for use in his or her trade or business

Produced for use

Average Tax Rate =

Taxpayer's tax liability / taxable income

Tariffs

taxes levied on goods and materials brought into a country

Marginal Tax Rate

applies to the next dollar of taxable income (or deduction)

Estate Tax

a wealth transfer tax that applies to transfers of property as a result of the owner's death

What is the most significant tax assessed by the U.S. government?

federal income tax

The Medicare tax pays...

for medical insurance for individuals who are elderly or disabled

Tax

forced payment made to a governmental unit that is unrelated to the value of goods or services received

Basic formula for net rental income

gross rental income + Prepaid rent + Rent cancellation payment + Improvement-in-lieu of rent - rental expenses

In a progressive individual income system, the marginal tax rate is always (higher or lower) than the average tax rate

higher

Use Tax

imposed on property to be used in one state but purchased in another state if no sales tax was paid in the state of purchase - self-assessed and usually at the same rate as the tales tax

Ad valorem

in proportion to the estimated value of the goods or transaction concerned

Note about interest expense

may be itemized if mortgage interest or investment interest is paid

Social Security pays...

monthly retirement benefits to qualified individuals

How are mortgage interest and real estate taxes treated on residence rented for fewer than 15 days?

mortgage interest (first or second home) and real estate taxes can be itemized

Forced Extractions

must pay but have no direct benefit from them

Hidden Taxes

paid but are not specifically itemized as part of the payment

Tax Bracket

range of income subject to a specific tax rate

Most common wealth tax

real property tax

Rental use expenses are deductible only to the extent of

rental income (no losses allowed)