Federal Income Taxation Essay Sample

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            The federal government of the United States of America imposes the progressive tax on the taxable income of the individuals, partnership businesses, companies, corporation trusts, decedent’s estates and certain bankruptcy estates.

            The advice I would give to the tax department employee is that under the Federal Income Taxes the management of the company can invest in the patented device because the government of the United States of America protects the investors of this intangible asset thus with the states protections the business can be carried out effectively.The  United States patent law protects the owners of the United States process patents  such that any person who, without authority, imports into the United States or uses or sells in the United States, and a person who uses the process patented products may be liable for the infringement of the patent law. The government of United States of America does not restrict the registration and licensing of businesses in the country, but the firm that operates in United States is subject to export controls on the jobs that involves the transfer of certain technology to other foreign countries.  The United States patent may be obtained by any person that invests or discovers new or useful processes, machine, manufacture or composition as a matter of concern.

The management of S corporation should prepare the financial statements according to the Generally Accepted Accounting Principles that require management to make estimates and assumption that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

            Since the S Corporation stated that it would   incur some losses during its first year or so of its operation, then the management of S Corporation should have recorded that the operating losses reported for tax purposes varied from one financial period to another due to the fact that the accumulated deficits of the retained earning of the different items in the financial statement differed in the way tax treatment or the timing was carried out.  The management of S Corporation should have had the tax losses carried forward in the next 20 financial years of the company and earned back for two years. The corporation was subject able to taxable income thus it would have used the graduated rates in the United States.  The rates ranged from 15% to 35%, thus the owners of S Corporation should prepare the financial statements using the graduated rates so that the company complies with States Company law so that it can be in a position to submit tax returns to the taxation authorities.

            The manager of S Corporation should have awarded themselves salaries since the tax burden on the individuals on the United States was lower as compared to other industrialized nation, since for the high-level income earning individuals under the United States Tax Code they were exempted from some phases of personal deductions and it imposed restriction on the itemed deductions.  There are six tax rate brackets for the individual income tax purposes these are 10%, 15%, 25%, 28%, 33% and 35%.  The tax rates are subjected on the  tax payers  that have  different income levels these are  the tax payers who  are jointly married, those who are married but they fill their returns separately and for the tax payers who are single and those who  head households of various companies.  The tax brackets are indexed annually so that they can reflect the current rate of inflation that keeps on changing due to the prevailing conditions of the economy such as political unrest, unfavorable climatic conditions and social and economic changes (Schmalbeck R. L 2007).

            The reasons why an unincorporated conduct form of entry should be used for the limited partnership, limited liability partnership or Limited Liability Company are that failure to comply with the filling of its certificate of incorporation, submission of application forms of the information of the activities and management would mounts to payment of fines and other penalties to the states.

            The difference between the S and C corporations is that the C Corporation is a corporation that is distinct from its owners that its earnings that are distributed to the owners who are taxed twice, once at the corporate level and the other at the personal level.  The S Corporation is  the corporation that is used by the business owners who evades to be taxed twice that is, double taxation and the earnings of the S Corporation are passed to the owners and this principle also applies to the partnership business and they are both taxed once.  The tax law limits the number of investors in S Corporation as well as in the partnership businesses. The clients should not question why the S Corporation is taxed as the partnership business because both companies take advantage of flow-through tax treatment that is they avoid double taxation unlike other corporations they are taxed twice. The management of the company should have reported its financial statements on the accrual basis of accounting this because its not possible for company’s to record cash transactions due to the fact that some expenses maybe paid for prior to their occurrence that is prepayments while the accruals may be incurred but they may not be paid for them thus for the company to have a consistent way of reporting its transactions it should apply the accrual basis of accounting so that consistent results are recorded. The depreciation and amortizations should be recorded on the basis of how the company minimizes its income tax liabilities because of the company may vary from accounting period to another

The clients who are intended to set up a small office building that would produce an aggregate of $450,000 tax loss during the first five years of operation, then produce a positive cash flow starting the sixth year of operation where it will produce taxable income and the cash flow that will exceed amount of taxable income for the sixth through the twelfth year they should have  noted that  the tax losses are carried forward in the next 20 financial years until the time the company generates income. The net income or loss of a company for any taxable year should be the amount of income as per the books of accounts of a company on its federal income tax return.  The corporates net worth is the sum of the entities issued and outstanding capital stock, surplus and the undivided profits as per the books of accounts set forth.

 The management of S Corporation should have noted that the cash flow indicates the inflow and outflow of cash from one financial period to the other while the profit and loss account states the profitability of a company therefore the management of the company should have appreciated the fact that the cash flow would exceed substantially the taxable income for the 6th and 12th year of the financial years of the company. The management of S Corporation should have followed all the tax laws so that it would record the financial statement accurately hence be in a position to determine the financial position of the company as compared to other companies in the industry that carried the same business activities.




VOL 7 NO. 3-4 MARCH-APRIL, 2001

Schmalbeck R. L (2007) Federal Income Taxation: Cases and Materials United States 2d ed., Aspen


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