notes_introduction - TAX 6845 Tax Planning & Consulting...

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1-1 TAX 6845 – Tax Planning & Consulting (September 1) Topic: General overview of tax planning updated: August 11, 2009 I. What is the primary objective of business decisions and how does taxation impact that that objective? A. The primary objective of business and financial decisions is to maximize after- tax value. 1. Shareholders invest in businesses that provide the greatest after-tax return on their investment. 2. Managers are rewarded for business and operating decisions that increase after-tax earnings and stock price. B. In this context, taxes represent a cost of doing business and must be managed in much the same way as production costs, employee salaries, transportation, marketing, research & development, and financing costs, etc. C. When decision makers ignore taxes – as is common in most accounting & business classes – they are implicitly assuming that tax costs will be incurred uniformly across each alternative. The tax consequences of a business transaction depend on the interaction of four variables: 1. The entity variable: Which entity undertakes the transaction? 2. The time period variable: During which tax year(s) does the transaction and its tax consequences occur? 3. The jurisdiction variable: In which tax jurisdiction(s) does the transaction occur? 4. The character variable: What is the tax character of the income (deduction) from the transaction? D. Tax planning seeks to exploit differences in tax treatment across entities, time periods, jurisdictions, and character.
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1-2 II. Possible goals of tax planning A. Is it to reduce or minimize the tax liability? Forgoing income – having no job and owning no property – or investing in tax-exempt bonds is not always the best answer. B. Is it to maximize after-tax income? Or perhaps to maximize the present value of after-tax cash flows? That would mean you should work a 100 hour week and not retire until you are too feeble to work. C. Is it to maximize an individual's well being or utility as some economists might say? That would help explain charitable contributions, gifts to family members, early retirement, vacations, and even marriage and having children. D. Is it to maximize society's or the world's well being? Is there some social responsibility? Although a CPA's responsibility is to be an advocate for their client, professional ethics limit how far CPAs can go in achieving that objective. They do not have the luxury afforded other consultants of adopting the attitude that “the client is always right”. Tax preparers must meet the ethical standards of their profession when recommending tax return positions to clients. In addition, they must also comply with statutory standards to avoid tax preparer penalties. Tax preparers can support uncertain tax positions that are not clear cut as long as the position has “ substantial authority ” (the weight accorded an authority depends on its relevance, its persuasiveness, and its source).
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This note was uploaded on 03/03/2010 for the course ACG 6845 taught by Professor Kelliher during the Spring '09 term at University of Central Florida.

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notes_introduction - TAX 6845 Tax Planning & Consulting...

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