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Financial Statements, Taxes, and Cash Flow > Tax Considerations
Tax Considerations
• Corporate Taxes
• Tax Deductions
• Depreciation
• Individual Taxes
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Financial Statements, Taxes, and Cash Flow > Tax Considerations
Corporate Taxes
• Legal forms of corporations include sole proprietorships, partnerships, C
corporations, S corporations, and LLCs.
• The type of corporation chosen will determine such factors as liability and taxation
on the entity.
• Taxable income for a corporation is defined as all gross income (sales plus other
income minus cost of goods sold and tax exempt income) less allowable tax
deductions and tax credits.
US Corporate Tax Rates
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Financial Statements, Taxes, and Cash Flow > Tax Considerations
Tax Deductions
• Business expenses are those that are incurred in order to generate profit for a
company, such as cost of goods sold.
• Ordinary expenses, such as interest paid on debt, are typically deductible as long
as they are appropriate to the nature of the business, the sort expected to help
produce income, and are not lavish and extravagant.
• In a progressive tax system, the marginal tax rate must be used in order to
calculate the after-tax cost of a deductible expense.
• While a deduction is a reduction of the level of taxable income, a tax credit is a
sum deducted from the total amount of tax owed.
Marginal Income Tax Rates
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Financial Statements, Taxes, and Cash Flow > Tax Considerations
Depreciation
• To determine depreciation expense, the useful life of an asset under depreciation
is estimated in time-units. Then the corresponding depreciation rate is calculated
that will extinguish the value of the asset from the books when the estimated
useful life ends.
• The straight-line method of depreciation reduces the book value of an asset by
the same amount each period.
• The declining balance method of depreciation provides for a higher depreciation
expense in the first year of an asset's life and gradually decreases expenses in
subsequent years.
Straight-Line Depreciation
• Activity depreciation methods are not based on time but on a level of activity, such
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as miles driven or cycle counts.
• Depreciation allows a company to properly identify the amount of income it
generates in a given period.
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Financial Statements, Taxes, and Cash Flow > Tax Considerations
Individual Taxes
• A direct tax is one imposed upon an individual person or on property, as opposed
to an indirect tax that is imposed upon a transaction.
• Income tax is levied on the total income of the individual, less deductions and
credits.
• Sales tax is levied on the state level on retail sale, lease, and rental of many
goods, as well as some services.
• Property tax is levied on interests in real property (land, buildings, and permanent
improvements).
• Estate tax is an excise tax levied on the right to pass property at death.
Federal Tax Receipts
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Appendix
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Financial Statements, Taxes, and Cash Flow
Key terms
• amortize To wipe out (a debt, liability etc. ) gradually or in installments.
• capital gains Profit that results from a disposition of a capital asset, such as stock, bond, or real estate due to arbitrage.
• filing status A status defining the type of tax return form an individual will use, which is based on marital status and family
situation.
• jurisdiction the limits or territory within which authority may be exercised
• salvage value The estimated value of an asset at the end of its useful life.
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Financial Statements, Taxes, and Cash Flow
Sales Tax Rates
This graph shows the effective sales tax rates for the 50 states.
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Wikipedia. "Average Effective Sales Tax of the 50 States (2007)." CC BY-SA
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Financial Statements, Taxes, and Cash Flow
Total Effective Tax Rates
This graph shows the total effective tax rates for each earning class in 2011.
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Financial Statements, Taxes, and Cash Flow
US Corporate Tax Rates
This graph shows the effect of corporate tax rates in the U.S. from 1947 through 2012.
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Wikimedia. "US effective corp tax rate 1947-2012." CC BY-SA http://commons.wikimedia.org/wiki/File%253AUS_effective_corp_tax_rate_1947-2012.png View on
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Financial Statements, Taxes, and Cash Flow
Federal Tax Receipts
This chart depicts the level of tax received by the United States federal government from each source in 2010.
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Wikipedia. "Federal Receipts by Source, 2010." CC BY-SA http://en.wikipedia.org/wiki/File:Federal_Receipts_by_Source,_2010.jpg View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Straight-Line Depreciation
Annual depreciation expense is equal to the original cost of the asset minus its salvage value, divided by the useful life of the asset.
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Wikipedia. "Depreciation." GNU FDL http://en.wikipedia.org/wiki/Depreciation View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Marginal Income Tax Rates
This graph plots the marginal income tax rates for the top tax bracket in the US from 1913 to 2009.
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Wikimedia. "MarginalIncomeTax." CC BY-SA http://commons.wikimedia.org/wiki/File%253AMarginalIncomeTax.svg View on Boundless.com
Financial Statements, Taxes, and Cash Flow
Which of the following types of business association is taxed as a
separate entity from its shareholders?
A) S Corporation
B) C Corporation
C) Partnership
D) Sole Proprietorship
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Financial Statements, Taxes, and Cash Flow
Which of the following types of business association is taxed as a
separate entity from its shareholders?
A) S Corporation
B) C Corporation
C) Partnership
D) Sole Proprietorship
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Financial Statements, Taxes, and Cash Flow
Which of the following is NOT a deduction associated with
carrying on a trade or business?
A) Cost of goods sold
B) Interest paid on debt
C) Incurred expenses that are ordinary and necessary for the conduct of
the business.
D) A loss on a sale of an income producing asset.
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Financial Statements, Taxes, and Cash Flow
Which of the following is NOT a deduction associated with
carrying on a trade or business?
A) Cost of goods sold
B) Interest paid on debt
C) Incurred expenses that are ordinary and necessary for the conduct of
the business.
D) A loss on a sale of an income producing asset.
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Financial Statements, Taxes, and Cash Flow
Which of the following statements regarding the declining balance
method of depreciation is true?
A) It is calculated based on level of activity.
B) It is the simplest method to calculate depreciation.
C) It has a higher depreciation expense in the asset's first year, which
decrease over time.
D) All of these answers
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Financial Statements, Taxes, and Cash Flow
Which of the following statements regarding the declining balance
method of depreciation is true?
A) It is calculated based on level of activity.
B) It is the simplest method to calculate depreciation.
C) It has a higher depreciation expense in the asset's first year, which
decrease over time.
D) All of these answers
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Financial Statements, Taxes, and Cash Flow
Which of the following is NOT a correct definition of an individual
tax?
A) The gift tax is imposed on individuals who transfer property to others
for less than adequate value.
B) Payroll taxes are imposed on employers and employees based on the
employees' compensation
C) Sales tax is an indirect tax on retail sales, lease and rental of goods,
as well as some services.
D) The property tax is a state tax imposed on ownership of real property
based on its acquisition cost.
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Financial Statements, Taxes, and Cash Flow
Which of the following is NOT a correct definition of an individual
tax?
A) The gift tax is imposed on individuals who transfer property to others
for less than adequate value.
B) Payroll taxes are imposed on employers and employees based on the
employees' compensation
C) Sales tax is an indirect tax on retail sales, lease and rental of goods,
as well as some services.
D) The property tax is a state tax imposed on ownership of real property
based on its acquisition cost.
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Financial Statements, Taxes, and Cash Flow
Attribution
• Wikipedia. "Tax rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_rate#Marginal
• Wikipedia. "Corporate taxes." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_taxes
• Wiktionary. "deduction." CC BY-SA http://en.wiktionary.org/wiki/deduction
• Wikipedia. "Tax deductions." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_deductions
• Wikipedia. "Gross income." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Gross_income
• Wikipedia. "Tax rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_rate#Marginal
• Wikipedia. "capital gains." CC BY-SA 3.0 http://en.wikipedia.org/wiki/capital%20gains
• Wikibooks. "Depreciation." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Depreciation
• Wikipedia. "Tax deductions." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_deductions
• Wikipedia. "Depreciation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Depreciation
• Wikipedia. "salvage value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/salvage%20value
• Wiktionary. "amortize." CC BY-SA 3.0 http://en.wiktionary.org/wiki/amortize
• Wikibooks. "US Corporate Law/Introduction." CC BY-SA 3.0 http://en.wikibooks.org/wiki/US_Corporate_Law/Introduction
• Wikipedia. "Corporate taxes." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_taxes
• Wikipedia. "C corporation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/C_corporation
• Wikipedia. "Limited liability company." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Limited_liability_company
• Wikipedia. "Sole proprietorship." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sole_proprietorship
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Financial Statements, Taxes, and Cash Flow
• Wikipedia. "Partnership taxation (USA)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Partnership_taxation_(USA)
• Wikipedia. "S corporation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/S_corporation
• Wiktionary. "jurisdiction." CC BY-SA 3.0 http://en.wiktionary.org/wiki/jurisdiction
• Wikipedia. "Taxation in the United States." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Taxation_in_the_United_States
• Wikipedia. "Tax." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax#Taxes_on_income
• Wikipedia. "Direct tax." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Direct_tax
• Wikipedia. "filing status." CC BY-SA 3.0 http://en.wikipedia.org/wiki/filing%20status
• Wikipedia. "Income tax." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Income_tax
• Wikipedia. "Tax deductions." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Tax_deductions
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