April 14 mgmt127a

April 14 mgmt127a - April 14, 2008 MGMT 127A There are...

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April 14, 2008 MGMT 127A There are certain things we don’t tax. Congress has scaled it back. No tax on gifts, inheritance, injury settlements, etc. There must be realization, and realization does not include a recovery of capital. However it is not always easy to determine recovery of cost. Examples 1. Two identical pieces of land, spread the cost. 2. Two non-identical pieces of land, but easy to spread the cost (oceanfront vs. non oceanfront) 3. Cost is not easily allocable—every dollar you get is cost recovery Two fundamental types of income -Ordinary Income -Capital Gains and Losses Ordinary Income- Any compensation for your labor—regardless of what it is called (salary, wages, commission, bonus, etc)—tax is applied at ordinary rate. The traditional rule is that earnings from investment is ordinary income. (Investment that provides periodic earnings). Rent from buildings Interest from bonds Royalties from patents
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For many years, dividends were considered ordinary income. However, a few years ago, there was a call for special treatment of dividends. Dividends are to be taxed more cheaply than ordinary income. Ordinary income can be taxed at a maximum of 1/3. Dividends are taxed at a flat rate of 15% to encourage investment in dividend paying stock. In general, getting people to invest is a good thing, but why do we encourage dividend paying investment rather than interest paying investments? Principles of tax usually stand the test of time—tweaks of little things end up occurring. Sale of property is normally a capital gain/loss. When you sell inventory it is a routine operation of business. If you collect from inventory or from accounts receivable, it is ordinary income. Capital gains are taxed at 15%, but the rules are more complex.
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With dividends, you simply write them down, but they are subject to a lot of rules. Follow things through a sifting process. There are two types of gains/losses. Held a year or longer- long term
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April 14 mgmt127a - April 14, 2008 MGMT 127A There are...

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