Lecture13a0.ppt

Lecture13a0.ppt - Lecture13Corporate Taxation...

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    Lecture 13  Corporate  Taxation
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    Outline of Lecture What is a corporation? Structure of the corporate income tax Role of corporate tax in the overall tax structure Examine effects on Choice of organizational form Dividend payout rate Forms of compensation Self-employment rate
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    Alternative legal forms of ownership  of a firm Non-corporate, so taxed under personal tax Proprietorship – one owner Partnership – several owners Subchapter S corporation C corporation, taxed under corporate tax with separate personal tax on shareholders when they receive dividends or realize capital gains
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    Attributes of a corporation Indefinite life not dependent on participation of current manager or shareholders Possibility of public and anonymous trading of shares In contrast, when a partnership changes ownership, legal papers filed with the State need to be revised Anonymous trading essential for large firms Limited liability
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    Limited liability With limited liability, shareholders at worst lose their shares. Non-corporate firms instead have unlimited liability, so owners are liable for any debts of the firm Which is preferable? Limited liability makes debt finance harder but equity finance easier Unlimited liability makes debt finance easier but equity finance harder Small firms generally rely mainly on debt finance so gain from unlimited liability, and conversely for large firms
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    Tax treatment of corporate income Definition of corporate income same as for non-corporate income: revenue – expenses Expenses consist of: Payroll Royalties Materials Interest payments Depreciation (estimated capital losses of capital) Amortization (estimated drop in value of intangible assets such as “goodwill”
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    Corporate tax base approximates  accruing capital gains to shareholders Most deductions represent income immediately taxable elsewhere: payroll, interest, royalties, material purchases Remaining income, net of depreciation and amortization, should then increase the value of shares, so represent capital gains to shareholders
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    Depreciation deductions Intended to capture drop in market value of buildings and equipment owned by firm Losses due both to use and to obsolescence Very hard to observe directly, so set based on statutory formulas Formulas consist of: Estimated life of particular capital, L Fraction of initial value, V , that is lost each year
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This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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Lecture13a0.ppt - Lecture13Corporate Taxation...

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