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Unformatted text preview: H Chapter Three H TAXABLE ENTITIES, TAX FORMULA, INTRODUCTION TO PROPERTY TRANSACTIONS LECTURE OUTLINE I. INTRODUCTION A. Taxable entities. There are only three types of entities subject to tax under the Federal income tax: 1. Individuals; Note: It may be effective to present the following examples to the class as discussion questions, letting them suggest solutions and debating alternatives. Example. Kris is 16 years old and earned $4,500 from a summer job. Is Kris required to pay tax? The $4,500 of wages is a good example of includable income. Others would be interest and dividend income and gains from the sale of investments. However, $4,500 alone does not generally subject one to tax. If Kris has other income and gains, the total income may be sufficient for her to incur tax. 2. Corporations; and 3. Estates and trusts (fiduciaries). B. Several other entities are either tax-exempt or their income is taxed directly to their owners. II. TAXABLE ENTITIES A. Individuals. Citizens and residents of the United States are subject to the Federal income tax under § 1 of the Code. 1. They are subject to tax on all forms of taxable income, regardless of source. 2. A sole proprietor’s business transactions are reflected in his or her taxable income. The income and expenses from the business are treated similarly to other forms of taxable income and deductible expenses. Refer the students to Schedule C, which appears in Appendix B. 3. A U.S. citizen or resident is taxed on worldwide income. To mitigate possible double taxation, a credit is allowed by the United States for taxes paid to the foreign government. 4. Nonresident aliens pay U.S. income tax only on their U.S. source income. B. Corporations. Domestic corporations are subject to tax on their taxable income under § 11 of the Code. 1. The determination of taxable income for a corporation is similar to that for an individual. Several key differences exist. 2. The corporation pays tax on its taxable income. If a portion of that profit is distributed, the distribution generally is taxed to the shareholder. a. Many believe this represents double taxation of the corporate profits. b. A corporation that receives dividend income generally only pays tax on 30 percent (or 20 percent) of the amount received. 3-1 3. Example. Kris owns 5 percent of the stock in Hansen Tools Corp. (a C corporation). Hansen had net taxable income for the current year of $100,000 and paid dividends to its shareholders totaling $30,000. What is the tax treatment of Hansen’s earnings? Hansen pays corporate tax on the net earnings of $100,000. In addition, Kris pays tax on the $5,000 ($30,000 5 percent) of dividends that she receives, in addition to the tax on her other income. The dividends are taxed as long-term capital gain....
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- Spring '08
- Taxation in the United States