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Accounting 426 - 2006
John R. Dorocak
Cal State University
San Bernardino
© Winter,l 2006, John R. Dorocak
This publication is distributed with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with its use. Tax laws are constantly changing and are subject to differing interpretation. In addition, the facts and circumstances in your particular situation may not be the same as those presented herein. Therefore, we urge you to do additional research and ensure that you are fully informed.
Chapter 1 - Introduction to Various Taxes Objectives of Course Federal Income Tax Calculation - Tax
formula (Individuals) Federal Income Tax Calculation - Tax
Returns (Individuals & other taxpayers)
5 Issues of Federal Income Tax
Is it income Is it deductible Is it ordinary income or capital gain When is it income To whom is it income
History of Federal Income Tax
1895: Pollock v. Farmer’s Loan & Trust Co
1913: 16th Amendment Revenue Acts Codes - 1939, 1954, 1986
Criteria to Judge Taxes
Adam Smith - equality, convenience, certainty, economy
1986 - fairness and simplicity (flatter rates & less deductions)
Internal consistency, policy objectives - see ”Factors” (policies) below
Revenue raising (revenue neutrality) (sources of federal revenues)
Various Taxes (other than federal income tax) * Property Taxes: ad valorem; realty v.
(fixtures) personalty; personal use v. business use
Excise taxes - state and federal *Sales/Use Taxes - State Value Added Tax (VAT) - potentially
federal (or state)
Death Taxes: estate (or inheritance), gift *Federal estate tax - purpose, marital
deduction, unified credit states - estate tax or inheritance tax *Gift taxes Federal gift tax - 12,000 (06) (adjusted) per
donee exclusion, marital deduction, unified credit, gift splitting
States - few have gift tax
Various Taxes (continued)
*State Income Taxes Local Income Taxes *Employment Taxes - FICA, FUTA
IRS Role - Audits, Pronouncements Sources of law - code; regs, rev ruls,
other IRS pronouncements
General Tax Formula - Various Taxes:
Base x Rate = Tax rates:
Proportional, progressive, regressive, flat
Factors Shaping Federal Tax Law (policies) Revenue needs economic considerations (policies) - e.g.,
stimulate economy social considerations (policies) - e.g.,
employee’s benefits equity - i.e., fairness Political - e.g., special interest IRS courts
Property Transactions
Gain Calculation: Amount Realized - Adjusted Basis = Gain (Chap 3)
Property Transactions
(Chaps 1,3,14,17) Amount realized - Adjusted Basis =
Gain or loss (Reg. 1001 (c) old 1002) Realization v. Recognition PROPERTY Usually a capital asset
tangible or intangible (e.g., stock, personal car, personal residence)
Property Transactions (continued)
Since property = cap asset, therefore gain = CG
LT v. ST CG (MT in 97 only)
1221
Lists what is not capital asset (chap 3, chap 14)
inventory a/r 1231 assets creative works gov docs
1231 Asset (Chap 14)
Depreciable personalty used in T or B (e.g., machine)
Realty used in T or B 1231 can be best of both worlds capital gain (subject to 5 year look -
back) ordinary loss
Depreciation Recapture(Chap 14)
Overrides 1231 and capital losses rules (corps add 291 recapture - R/E) as if (1245-1250) x 20%)
Subject to non recognition - 1031, 1033, 121, 341 - see Reg. (old) 1.1002 (Chap 13)
1245 Recapture
1245 Recapture (recapture all deprec to extent of gain = OI)
Personalty Commercial (non resid) R/E 81-86
1250 Recapture - R/E
Basically excess of accel’d over S/L (note 81-86 commerc R/E above 1245)
(Chap 13, Chap 16)
LT Capital Gains Rates
20% & 10%
97 only - if assets held at least 18 mo, beginning 7/29/97 (Also if held >12 mos & sold after 5/6/97 but before 7/29)
98 forward - If assets held >12 mo, beginning 1/1/98
STCG - Regular rates
LTCG Rates (continued)
18% 8%
If assets held 5 yrs, beginning after 12/31/2000
t/p >15%, acquire after 12/31/00 unless elect recognize gain on 1/1/01
LTCG Rates (continued) 28/25/15/10%; 25/15/10%
28% & 25% 15% & 10% - collectibles 25% & 15% & 10% - 1250 Property -
Portion possibly at 25%
Home Sales
Principal residence Sec 121
500,000 (250,000 single) exclusion - sales after 5/6/97
LT Capital Gains Rates(& Dividends ’03 – ‘08
5% (5/6/03 – 12/31/07) 0% (1/1/08 – 12/31/08) 15% (5/6/03 – 12/31/08)
JGTRRA ‘03
LT Capital Gains Rates (+ Dividends ’09-‘10
5%
15%
TIPRA 06