2007 Chapter 9 pt2-1

2007 Chapter 9 pt2-1 - Income Taxes Chapter 9 part 2 1 A....

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1 Income Taxes Chapter 9 part 2
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2 A. The key point is that since taxes are a cash outflow of a project, our economic analyses must reflect the after-tax cash flow of a project in order to achieve a true reflection of the cash flow patterns. B. Tax laws are imposed for revenue generation. However, a secondary purpose is that of social legislation. The laws are very complex with many exceptions. However, this section attempts to capture the fundamental concepts.
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3 C. In a sense, the government shares in every profitable venture through the taxation of a portion of the profits. The contra is also true if the individual or corporation has other profit generating activities to offset the loss in a venture.
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4 D. Forms of business organization for tax purposes: Individual : Applicable to an employee, a sole proprietor (individual engaging in business alone) or individual members of partnerships; taxed at individual rates. Partnership : Must file annual information return, each partner is taxed on his share of partnership earnings - whether or not distributed. Corporation : Taxed at corporate tax rates unless the corporation qualifies for Subchapter S treatment (100 or fewer stockholders) in which case the Subchapter S is treated like a partnership.
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5 Thus we note that earnings to a corporation are taxed twice: Once while in the corporation Once after distribution to shareholders as dividends This occurs because dividends are not a tax deductible expense for the corporation.
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6 E. Taxation for individuals: Marginal percentage rates increase as taxable income increases. Taxable income = adjusted gross income (revenue, earnings) - deductions for exemptions - itemized deductions in excess of standard deduction
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7 F. Taxation for corporations: Tax rates: 35% currently Lower rates for taxable income below $10,000,000 Taxable income = gross income (revenue) - expenditures for operating
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2007 Chapter 9 pt2-1 - Income Taxes Chapter 9 part 2 1 A....

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