Taxation Law Essay Sample
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Introduction of TOPIC
The United States federal government imposes income tax on individuals and corporates that generate income within the United States and outside the United States. This follows from the nature of the taxation system that has been adapted in the United States that stretches to reach the United States citizens generating income outside the United States. The federal government, through the Internal Revenue Service (IRS), it applies a progressive tax on the taxable income (Blakey, 2006). The taxable entities include individual persons residing in the United States both citizens and non citizens, and the American citizens who are generating income outside the country.
The other entities that are liable to pay income tax include the partnerships, both limited and unlimited companies, corporations, trusts and estates. Income tax policies in the US can be traced back to 1890’s under the United States Constitution, that is, Article one, section 1., as given in clause one (Graets, 1999).This was during the time of the civil war. At the current times, the income tax provisions are contained in the United States constitution and also provisions that are given in the Internal Revenue Service Code. The Internal Revenue Service is the agency that is responsible for the US tax income collection and also the enforcing of the taxation rules. The main aim of the rules is to define the scope of taxation and the also ensure that there are minimum tax evasion cases reported in the United States.
The taxable income can be grouped broadly into two, that is, ordinary income and capital gains income. Ordinary income simply imply the compensation that is given in return for the services provided by an individual person. Examples of ordinary income include wages and salaries that are awarded to individuals on them providing their services. The other examples include income arising from business profits, dividends that are earned on owning stock of some company, and the interest that is earned from long term investment of funds (Larkins, 2003). Capital gain implies the gain that is attained on selling a capital good. The difference in terms of the tax rate that is imposed on the two forms of incomes is that, the tax rate imposed on ordinary income is higher than the tax rate that is applicable on capital gain.
The following incomes can be categorized as either ordinary income or capital gain or otherwise. They are discussed one by one as given below:
- a) Selling of three cows by a farmer to another farmer.
Cows can be perceived as assets that are owned by a farmer in his or her farm. The monetary value of cows keep on changing with time depending on the health and productivity of level of the cows. The income that is generated from selling a cow can not be perceived as being an ordinary income because there are no services that have been offered by any one for monetary gain, otherwise, an asset has been transferred to another person for economic gain. The transfer of an asset can either be a capital gain or a capital loss depending on the value of the cows on the farmer attaining them compared to the time when he was disposing them to another person (Steven, 2003). He or will only be taxed if he realizes a capital gain. Therefore, selling of cows to another farmer is not an ordinary income but rather a capital gain.
b) The case for a plumber being compensated for $600 on doing plumbing work and another $150 on him or her replacing power points.
The plumber providing services, that is either by replacing a power point or doing a plumbing work all implies services that are provided by a plumber for a pay. Compensations that are given to a service provider in providing services qualify to be regarded as being an ordinary income (Joseph, 2006). The income is subject to taxation according to the United States taxation system.
c) Andrew owning greyhounds that he holds as a hobby but he sells an average of twelve greyhounds annually.
Andrew owning of greyhound as a hobby implies that he is not earning any income out of the greyhounds but just keeping them for fun. On him making an attempt to sell the greyhound, the act enables Andrew to generate some income. On
holding belongings for personal benefit does not imply income for oneself, thus there is no income
d) Retail selling of goods and selling of a business asset.
Richard who owns a greengrocery business realized a sales income of $90,000 from selling vegetables, $70,000 on selling fruits and $20,000 on selling a delivery truck. The activities of Richard selling fruits and Vegetables in his business is a businesses activity that generates income which accounts for the profits that he is likely to earn. On assumption that Richard was able to realize some profits for the sale of these goods, he is liable to pay tax given the fact that profits realized from business activities are regarded as being ordinary incomes (Terry, 2000). The earnings from selling a delivery truck can not be regarded as being an ordinary income because a truck is an investment that makes the income to qualify as a capital gain.
Nicholas works as a dry cleaner. He was paid $35,000 for the services that he provided at the end of the year. He had savings that earned him an interest of $3000. As part of his wealth, Nicholas owns a property at St. Kilda that he has lent to friends who paid him $10200 as rent for that year. The income that was earned by Nicholas in the year can be attributed into various types of income and evaluated on if they qualify for taxation purposes according to the United States taxation policies.
The income that Nicholas receives as a salary for his services as a dry cleaner qualify to be regarded as an ordinary income as explained early. This income is liable for taxation as provided by the US taxation rules. The interests that Nicholas earns from his saving as provided above are regarded as being an ordinary income (Barry, 2005). Therefore, the interest is liable for taxation. The income that Nicholas realizes as rent is an income that is realize in the term, that is, a time less than one year. This form of income is an ordinary income and its subject to tax according to the United States taxation policies.
Kate is working as a lawyer who owns his own law firm that provides law advices to business owners. Kate has three workers and she incurs various expenses. Some of the expenses that she incurred include the following: the purchase of a set of law reports that contain the decided cases of commercial laws that will be used in the long-run in the firm, payment of the annual commercial law news letter, tuition fees for Kate undertaking a bicycle repair and maintenance course, and the framing of the employees’ degrees. Expenses in the normal business understanding, they are deducted from the total revenue of the organization on calculating the organization’s profitability level (Johnstone, 2007).
In relation to income taxation, expenses are likely to affect the taxable income on the sense that they are likely to impact the reported net income of the firm that will determine the amount of tax that is payable by the firm to the federal government tax kit. By definition, tax-deducible expense implies expenses that affects the taxpayer’s taxable income (Alan, 1978). The expenses are normally subtracted from the gross income on the taxpayer computing the tax income that he or she ought to pay to the federal government. Following this reason, the expenses will have an impact of lowering the taxable income which will have an impact on the tax paid. This situation implies that an exaggerated expenditure in a firm will alter the rightful income tax that the firm has to pay to the federal government’s treasury. The reduced taxable income implies low payments as tax to the government. This situation therefore call for the need of the firms allocating their expenses in a controlled manner on enabling the IRS to collect reasonable incomes in the form of taxes (Dian, 2007). The allocation of expenses should be guided by only including the expenses that lead to the generation of the income as a guide to identify the expenses that ought to be included in computing taxable income (Francis, 2005).
Kate incurred a number of expenses as provided above. Each of the expenses can be regarded as either deductible or non-deductible with regard to their effect on income tax. For instant, the purchasing of law reports that will be used in the firm can be perceived as being a deducible expense on the reason that, it is an expenditure that is incurred on trying to improve the efficiency of the firm following the skills that are certain to be gained on reading the reports, thus contributing to the income generated by the firm.
The purchasing of the weekly commercial law newsletter can be perceived as being similar to the purchase of the law reports thus an expenditure that is deducible. The tuition fee that Kate paid for bicycle repair and maintenance course can not be perceived as being a deducible expense because the skills that are attained from the course do not contribute in anyway to the success of the firm. The expenditure incurred on the framing of the employees’ degrees and hanging them on the office wall is a deductible expense on the reason that it will improve the firm’s reputability that will promote income level.
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