Principles of Taxation for Business and Investment Planning

Cover Principles of Taxation for Business and Investment Planning Dedication About the Authors A Note from the Authors Changes in Principles of Taxation, 2024 edition Content Organization Key Learning Tools Online Assignments Acknowledgments Introduction to Students Brief Contents Contents Part One: Exploring the Tax Environment Chapter 1: Taxes and Taxing Jurisdictions Some Basic Terminology The Relationship Between Base, Rate, and Revenue Transaction- or Activity-Based Taxes Earmarked Taxes The Pervasive Nature of Taxation Local Taxes State Taxes Federal Taxes Taxes Levied by Foreign Jurisdictions Jurisdictional Competition Dynamic Nature of Taxation Tax Base Changes Taxes and the Political Process Taxes and Data Analytics Sources of Federal Tax Law Statutory Authority Administrative Authority Judicial Authority Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 2: Policy Standards for a Good Tax Standards for a Good Tax Taxes Should Be Sufficient The National Debt How to Increase Tax Revenues Static versus Dynamic Forecasting Behavioral Responses to Rate Changes Taxes Should Be Convenient Taxes Should Be Efficient The Classical Standard of Efficiency Taxes as an Instrument of Fiscal Policy Taxes and Behavior Modification Taxes Should Be Fair Ability to Pay Horizontal Equity Distributive Justice The Perception of Inequity Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Case Part Two: Fundamentals of Tax Planning Chapter 3: Taxes as Transaction Costs The Role of Net Present Value in Decision Making Quantifying Cash Flows The Concept of Present Value The Issue of Risk Net Present Value Example Taxes and Cash Flows The Significance of Marginal Tax Rate Net Present Value Example Revisited The Uncertainty of Tax Consequences Structuring Transactions to Reduce Taxes An Important Caveat Transactional Markets Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Tax Planning Cases Chapter 4: Maxims of Income Tax Planning Tax AvoidanceóNot Evasion What Makes Income Tax Planning Possible? The Entity Variable Income Shifting Deduction Shifting Constraints on Income Shifting The Time Period Variable Income Deferral and Opportunity Costs Income Deferral and Rate Changes The Jurisdiction Variable The Character Variable Determining the Value of Preferential Rates Constraints on Conversion Implicit and Explicit Taxes Developing Tax Planning Strategies Additional Strategic Considerations Tax Legal Doctrines Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 5: Tax Research Developing Tax Research Skills The Tax Research Process Step 1: Get the Facts Step 2: Identify the Issues Step 3: Locate Authority Primary Authorities Secondary Authorities Strategies for Locating Relevant Authority Step 4: Analyze Authority Step 5: Repeat Steps 1 Through 4 Step 6: Communicate Your Conclusions Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Part Three: The Measurement of Taxable Income Chapter 6: Taxable Income from Business Operations Business Profit as Taxable Income The Taxable Year Changing a Taxable Year Methods of Accounting Tax Policy Objectives The Cash Method Constructive Receipt Prepaid Expenses and Interest Merchandise Inventories Limitations on Use of the Cash Method by Corporations The Accrual Method Contrasting Perspectives on Income Measurement Permanent Versus Temporary Differences Tax Expense Versus Tax Payable Temporary Book/Tax Accounting Differences Net Operating Losses and Excess Business Losses The Problem of Excess Deductions Solution: The NOL Deduction Valuing an NOL Deduction Accounting for NOLs Excess Business Losses Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 7: Property Acquisitions and Cost Recovery Deductions Deductible Expense or Capitalized Cost? Repairs and Cleanup Costs Deductions of Capital Expenditures as Subsidies The Critical Role of Tax Basis Basis, Cost Recovery, and Cash Flow Cost Basis Introduction to Cost Recovery Methods Inventories and Cost of Goods Sold The UNICAP Rules Computing Cost of Goods Sold Depreciation of Tangible Business Assets Book and Tax Concepts of Depreciation The MACRS Framework Limited Depreciation for Passenger Automobiles Section 179 Expensing Election Bonus Depreciation Purchase Versus Leasing Decision Amortization of Intangible Assets Organizational and Start-Up Costs Leasehold Costs and Improvements Research and Experimentation Costs after 2021 Business Acquisition Intangibles Comprehensive Example of a Lump-Sum Purchase Depletion of Natural Resources Percentage Depletion Cost Recovery-Related Book/Tax Differences Depreciation Book/Tax Differences Inventory Book/Tax Differences Book/Tax Difference for Organizational and Start-Up Costs Book/Tax Difference for Goodwill Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Appendix 7-A Midquarter Convention Tables Chapter 8: Property Dispositions Computation of Gain or Loss Recognized Sales and Exchanges Seller-Financed Sales Disallowed Losses on Related Party Sales Tax Character of Gains and Losses Capital Asset Defined Capital Loss Limitation Taxation of Capital Gains Capital Asset Definition Revisited Dispositions of Noncapital Assets Inventory Business Accounts Receivable and Supplies Section 1231 Assets Depreciation Recapture Comprehensive Example Other Property Dispositions Abandonment and Worthlessness Foreclosures Casualties and Thefts Book/Tax Differences on Asset Dispositions Gain or Loss Book/Tax Differences Book/Tax Difference for Nondeductible Capital Loss Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 9: Nontaxable Exchanges Tax Neutrality for Asset Exchanges A Generic Nontaxable Exchange Exchanges of Qualifying Property The Substituted Basis Rule The Effect of Boot Book/Tax Difference from Nontaxable Exchange Summary Like-Kind Exchanges Exchanges of Mortgaged Properties Involuntary Conversions Formations of Business Entities Corporate Formations Partnership Formations Wash Sales Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Comprehensive Problems for Part Three Part Four: The Taxation of Business Income Chapter 10: Sole Proprietorships, Partnerships, LLCs, and S Corporations Sole Proprietorships Overview of Schedule C Employment Taxes Self-Employment Tax Partnerships Forming a Partnership Limited Liability Companies Partnership Reporting Requirements Tax Consequences to Partners Adjusting the Basis of a Partnership Interest Basis Limitation on Loss Deductions Subchapter S Corporations Eligible Corporations Tax Consequences to Shareholders Adjusting the Basis of S Corporation Stock Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Appendix 10-A Calculating the QBI Deduction When Taxable Income is in the Phase-in Range Chapter 11: The Corporate Taxpayer Legal Characteristics of Corporations Affiliated Groups Nonprofit Corporations Computing Corporate Taxable Income The Dividends-Received Deduction Reconciling Book Income and Taxable Income Computing the Regular Corporate Tax Tax Credits Rehabilitation Credit Alternative Minimum Tax Calculating AFSI Calculating AMT Minimum Tax Credit Payment and Filing Requirements Distributions of Profits to Investors Alternatives to Double Taxation Incidence of the Corporate Tax Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Appendix 11-A Schedule M-3 for Reconciling Book and Taxable Income Chapter 12: The Choice of Business Entity Tax Planning With Passthrough Entities Tax Benefit of Start-Up Losses Avoiding a Double Tax on Business Income Income Shifting among Family Members Partnership or S Corporation? Contrasting Characteristics Two Planning Cases Tax Planning With Closely Held Corporations Getting Cash out of the Corporation Rise and Fall of the Corporate Tax Shelter Penalty Taxes on Corporate Accumulations Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 13: Jurisdictional Issues in Business Taxation State and Local Taxation Gross Receipts Taxes Constitutional Restrictions on State Jurisdiction Apportionment of Business Income Tax Planning Implications Tax Consequences of International Business Operations Income Tax Treaties U.S. Jurisdiction to Tax Global Income Foreign Tax Credit Limitation on the Annual Credit Reduced Tax Rate on Foreign-Derived Intangible Income Organizational Forms for Overseas Operations Branch Offices and Foreign Partnerships Domestic Subsidiaries Foreign Subsidiaries Tax Consequences of Operating Abroad Through A Foreign Corporation Pre-2018 Deferral Regime for Foreign Corporations Post-2017 Participation Exemption for Foreign Corporations Transition from Deferral Regime to Participation Exemption Controlled Foreign Corporations Limitations on Cross-Border Income Shifting Book/Tax Differences Related to Foreign Operations Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Comprehensive Problems for Part Four Part Five: The Individual Taxpayer Chapter 14: The Individual Tax Formula Filing Status for Individuals Married Individuals and Surviving Spouses Unmarried Individuals Who Qualifies as a Dependent Overview of the Taxable Income Computation The Four-Step Procedure Step 1: Calculate Total Income Step 2: Calculate Adjusted Gross Income Step 3: Subtract Standard Deduction or Itemized Deductions Step 4: Subtract the QBI Deduction Amount The Taxable Income Formula Computing Individual Tax Individual Tax Rate Schedules The Elusive Marginal Tax Rate The Marriage Penalty Dilemma Individual Tax Credits Child Credit Dependent Care Credit Earned Income Credit Excess Social Security Tax Withholding Credit Alternative Minimum Tax Computing AMT Payment and Filing Requirements Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter 15: Compensation and Retirement Planning The Compensation Transaction Employee or Independent Contractor? Tax Consequences of Worker Classification Worker Classification Controversy Wage and Salary Payments Tax Consequences to Employees Tax Consequences to Employers Reasonable Compensation Foreign Earned Income Exclusion Employee Fringe Benefits Employer-Provided Benefits Fringe Benefits and Self-Employed Individuals Compensation Planning with Fringe Benefits Equity-Based Compensation Restricted Stock Stock Options Consequences to Corporate Employer Incentive Stock Options Retirement Planning Tax Advantages of Qualified Retirement Plans Premature Withdrawals Types of Qualified Plans Employer-Provided Plans Plans for Self-Employed Individuals Individual Retirement Accounts Limits on IRA Contributions Deduction of IRA Contributions Withdrawals from IRAs Rollovers to IRAs Conclusion Sources of Book/Tax Differences Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Chapter Sixteen: Investment and Personal Financial Planning Business Versus Investment Activities Investments in Financial Assets Dividend and Interest Income Tax-Exempt Interest Deferred Interest Income Life Insurance Policies and Annuity Contracts Gains and Losses From Security Transactions Computing Gains and Losses Tax Consequences of Capital Gains and Losses Netting Capital Gains and Losses Preferential Rates on Long-Term Capital Gains Policy Reasons for a Preferential Rate Capital Loss Limitation Investments in Small Corporate Businesses Qualified Small Business Stock Section 1244 Stock Investment Expenses Investment Interest Expense Investments in Real Property Undeveloped Land Rental Real Estate Investments in Passive Activities Passive Activity Loss Limitation Planning with Passive Activity Losses Unearned Income Medicare Contribution Tax Wealth Transfer Planning The Transfer Tax System The Gift Tax The Estate Tax Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Appendix 16-A Comprehensive Schedule D Problem Chapter 17: Tax Consequences of Personal Activities Gross Income From Whatever Source Derived Prizes, Awards, Gifts, and Inheritances Legal Settlements Government Transfer Payments Gains on Sales of Personal Assets Personal Expenses Medical Expenses Local, State, and Foreign Tax Payments Charitable Contributions Tax Subsidies for Education Personal Losses Losses on Sales of Personal Assets Casualty Losses Hobby and Gambling Losses Tax Consequences of Homeownership Home Mortgage Interest Deduction Vacation Home Rental Exclusion of Gain on Sale of Principal Residence Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Comprehensive Problems for Part Five Appendix 17-A Social Security Worksheet (Adapted from IRS Publication 915) Part Six: The Tax Compliance Process Chapter 18: The Tax Compliance Process Filing and Payment Requirements Late-Filing and Late-Payment Penalty Return Processing The Audit Process Types of Audits Assessments of Deficiencies and Interest Your Rights as a Taxpayer Noncompliance Penalties Tax Return Preparer Penalties Contesting the Result of An Audit Litigation A Case History: Lori Williams v. United States Making the Legal System More Taxpayer Friendly IRS Collection Procedures The Innocent Spouse Rule Conclusion Key Terms Questions and Problems for Discussion Application Problems Issue Recognition Problems Research Problems Tax Planning Cases Appendixes Appendix A: Present Value of $1 Appendix B: Present Value of Annuity of $1 Appendix C: 2023 Income Tax Rates Glossary Index