CORPORATE TAX PLANNING BOOK

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Primarily Written For The Students Of Commerce, The Present Book Is A Complete Study Of Tax Planning, Tax Procedures And Management, Wealth Tax, Value. Corporate Tax Planning, 6th Ed., Vol. 1 [Kaushal Kumar Agrawal] on site. com. *FREE* shipping on qualifying offers. Primarily written for the students of. Strategic Corporatetax planning JOHN E. KARAYAN CHARLES W. SWENSON his book shows managers the principles of tax management and how to apply.


Corporate Tax Planning Book

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A presentation by Niranjan Swain,. OPGCL,Bhubaneswar. Corporate Tax Planning. Money Saved is Money Earned. Presented by Niranjan. Results 1 - 30 of Discover Book Depository's huge selection of Corporate Tax Books Corporate and Individual Tax Planning (RoI) Fae Core. This post on Top 10 Best taxation Books is to give you a heads up on tax & a sneak peek in what #2 – Fundamentals of Corporate Taxation (University Casebook Series) #5 – Principles of Taxation for Business and Investment Planning.

In deciding the case, however, the court also must determine what the applicable rules of law are and how to apply them to the facts of each case. A written judicial opinion typically results. These present the facts, cite the relevant laws, and explain the decision, and can be found via commercial tax services or via the Web again, it is easiest to find them by starting with a gateway Web site.

If the outcome here is unsatisfactory, the next step is the U. Court of Appeals. Appeals courts can reverse trial courts, but only where the rules of law were not properly applied. A very small percentage of cases decided by trial courts are further litigated in U.

Courts of Appeal. These courts analyze the rules of law applied by trial courts for errors, but do not redetermine what the facts are. Finally, the taxpayer can attempt to go to the U. Supreme Court, although tax cases are rarely heard by the high Court.

Less than a handful are decided every year by the Supreme Court, the opinions of which become the law of the land. With some exceptions, each of A Framework for Understanding Taxes 35 these courts issues its decisions in the form of written opinions, which form precedents that bind future court decisions on similar issues.

However, most tax systems have developed around fundamental concepts that do not change much and thus provide a deep structure to tax rules. For example, a number of principles and concepts guide how tax laws are structured in the United States. While they cannot be used to provide guidance on all tax rules, they generally explain why many tax laws are structured the way they are throughout the world.

Ability-to-Pay Principle Under the ability-to-pay principle, the tax is based on what a taxpayer can afford to pay. One concept that results from this is that taxpayers are generally taxed on their net incomes. Corporation X will pay more taxes, because it has greater net income and cash flows, and thus can afford to pay more.

This concept does not apply to every tax in every jurisdiction. Nor do the rest of the concepts presented in this section.

Furthermore, those that do most often are understood rather than explicit. That is, they are unofficially applied administratively rather than mandated by primary sources of law. These concepts are more likely to have developed in more industrialized societies where tax laws have become more complex, the foremost example being the United States.

Nevertheless, by suggesting what the tax rules ought to be, these concepts can help people understand current rules and anticipate what the rules will most likely be in the future. Entity Principle Under the entity principle, an entity such as a corporation and its owners for a corporation, its shareholders are separate legal entities. As such, the operations, record keeping, and taxable incomes of the entity and its owners or affiliates are separate.

Doctrines are principles that, while often not officially appearing in the tax laws, carry the weight of law. In the United States, for example, doctrines are developed through a series of court cases. A Framework for Understanding Taxes 37 In applying the ownership test, constructive ownership is considered.

That is, indirect ownership and chained ownership are considered. Taxpayers must pay part of their estimated annual tax liability throughout the year, or else they will be assessed penalties and interest. For individuals, the most common example is income tax withholding. These taxes, and the requirements for withholding, can be imposed by local governments such as cities as well as higher levels such as state and national governments , but are more common of the higher levels. In many countries, the withholding is the tax; in the United States, it is only a prepayment, which is reflected as a credit against further liability when the relevant tax return for the period is filed.

If the taxpayer also has nonwage income that is, income not subject to withholding , the taxpayer must remit one-fourth of the estimated annual tax due on this nonwage income every three months. If these estimated taxes are not paid in advance, the taxpayer will be subject to penalties and interest. A FRAMEWORK Under the same pay-as-you-go principle, corporations in the United States which typically do not have taxes withheld must remit one-fourth of their estimated annual tax every three months by making estimated tax payments.

All-Inclusive Income Principle This principle basically means that if some simple tests are met, then receipt of some economic benefit will be taxed as recognized income, unless there is a tax law specifically exempting it from taxation.

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The tests are as follows each test must be met if an item is considered to be income: Is there a transaction with another entity? Is there an increase in wealth? The first is a commonsense test meant to eliminate things that cannot be income. For example, making an expenditure cannot generate income. The second test is the realization principle from accounting; that is, for income to be recognized, there must be a measurable transaction with another entity.

Therefore, accretion in wealth cannot generate income. It sells the stock for its fair market value, but not the land. Income is recognized only on the stock; there has been no realization on the land. The increase-in-wealth test means that unless there is a change in net wealth, no income will be recognized. This eliminates a number of transactions from taxation.

Although each of these transactions involves cash inflows and transactions with other entities, there is no change in net wealth. This because for each of the three cash inflows, there is an offsetting increase in liabilities or equity payable.

Closely related to the income-realization concept are the concepts of recovery of capital, claim of right, and constructive receipt. Under claim of right, income is recognized once the taxpayer has a legal right to the income. Note that constructive receipt applies only to cash-basis taxpayers; accrual-basis taxpayers recognize income if it is realized regardless of whether it is received.

The sale is for cash. The sale was at year-end. The corporation did not pick up the check from the client until the beginning of the next year, even though the money was available to it before year-end.

On the second item, there is no income because there is no legal claim of right to the funds; they will legally have to be returned. If it is an accrual-basis taxpayer, when it receives the cash is irrelevant; income is recognized at the time of the sale. If it is a cash-method taxpayer, constructive receipt occurs this year, since the funds are available. Note that the concept of recovery of capital also implies that if the taxpayer does not dispose of the asset, the taxpayer can recover the tax basis over time through depreciation.

The extant depreciation used, for federal income tax purposes, is the modified cost recovery system MACRS , discussed later in the chapter. With only minor exceptions, a capital expenditure cannot be expensed but instead must be depreciated over time.

Here, income that would normally be taxed under the preceding rules is either exempt from tax or subject to a lower tax rate due to special rules. In the United States, for example, these can be provisions in the law, such as the Internal Revenue Code enacted by Congress or its equivalent at the state level.

For all taxpayers, one example is the federal exclusion of interest income from state and local obligations. Perhaps the most significant is the preferential tax rates given to long-term capital gains. The standard U. This rate can be even lower: In many countries, gains from the sale of long-held assets are exempt from taxation. The legislative grace concept applies to deductions as well deductions are expenses that can be used to reduce taxable income.

In the United States, no deduction is allowed under federal and most state income tax laws unless it is specifically authorized by the law. For businesses and sole pro- A Framework for Understanding Taxes 41 prietors, the usual types of expenses are generally allowed for tax purposes. However, other deductions for individuals exist purely by legislative grace. For example, as already noted there is a fixed standard deduction. If greater, however, individuals are allowed itemized deductions bounded by elaborate ceilings and floors for medical expenses, charitable contributions, state taxes paid, home mortgage interest expense, casualty and theft losses, and certain miscellaneous types of expenses.

Business Purpose Concept Business purpose is closely related to legislative grace as it relates to deductions. Here, business expenses are deductible only if they have a business purpose, that is, the expenditure is made for some business or economic purpose, and not for tax-avoidance purposes. The test is applied to a bona fide trade or business, or to expenses for the production of income. The former is a sole proprietorship, corporation, or other business entity.

The latter generally includes investment-type income of individual investors. This rule is typically enforced only when the business deduction also gives some economic benefit to the owner; thus, the owner is trying to get something of value in after-tax dollars, when the item is not otherwise deductible. The rule is typically enforced only in closely-held businesses.

She has the corporation download an aircraft to facilitate any out-of-town business trips she might make. The entrepreneur, who also happens to enjoy flying as a hobby, rarely makes out-of-town business trips. Since the plane will not really help the business, and there is a tax-avoidance motive the plane would generate tax-depreciation deductions , there is no business purpose to the aircraft.

Accordingly, any expenses related to the aircraft, including depreciation, are nondeductible. Accounting Methods As already noted, some general rules apply when a taxpaying entity wants to choose among cash, accrual, or hybrid part cash, part accrual methods of accounting. For individuals, the election is made on their first tax return. Virtually every individual elects the cash method.

For businesses, two rules apply. Note that this rule still permits the taxpayer to use the cash method for other items of income and expense. The second rule relates to entity type. Aside from the inventory and the entity-type rules, a business is free to choose any method of accounting. Tax-Benefit Rule Under the tax-benefit rule, if a taxpayer receives a refund of an item for which it previously took a tax deduction and received a tax benefit , the refund becomes taxable income in the year of receipt.

Note that the rule applies only to items for which the firm has received a tax benefit. Accordingly, if the firm was in an NOL status in the prior year, or the amount paid was nondeductible say, a bribe to a lawmaker , the refund would not be taxable income the next year. Substance over Form Under the doctrine of substance over form, even when the form of a transaction complies with a favorable tax treatment, if the substance of the transaction is the intent to avoid taxes, the form will be ignored, and the transaction recast to reflect its real intent.

The doctrine of substance over form empowers tax authorities to tax at least part of the salary as if it were a dividend. Examples are cases such as Gregory v. Helvering in the United States, Furniss v. Dawson in the United Kingdom, and Regina v. Mitchell in Canada.

Recovery of Capital and Calculation of Gains and Losses A fundamental concept, related to the doctrine of recovery of capital, is the idea of gains and losses. That is, only the net gain or loss from the sale of property is taxable or deductible for income tax purposes in virtually every jurisdiction.

Capital improvements are additions that have an economic life beyond one year. Accumulated depreciation applies only in the case of an asset used in business.

The gain is Amount Realized: Adjusted Basis: Original basis Add: Capital gains and losses result from the sale of capital assets, which are defined as any asset other than the following: All other assets are ordinary and create ordinary gains and losses.

As a practical matter, corporations pay the same tax rate their normal rate on ordinary and capital gains. However, losses are treated differently for corporations. Ordinary losses are deductible without limit, while net capital losses are not deductible and must be carried back three years, and if still unused, forward five years.

This results in: Amount Realized: Original basis Less: Then, unless the corporation had other capital gains against which to offset the loss, the loss would be carried back three years to offset any possible capital gains in that year.

Multiple gains and losses must be separated into capital versus ordinary. Next, ordinary gains and losses are netted with each other. Separately, capital gains and losses are also netted with each other. Within the capital category, they must be segregated into short term versus long term. As a practical matter, this long- and short-term distinction does not matter for corporations, 45 A Framework for Understanding Taxes since the tax effect is identical. As explained later in the chapter, the distinction does matter for individual taxpayers, since there is a preferential tax rate for long-term capital gains, that is, gains on assets that have been owned by the taxpayer for more than one year.

The netting process is as follows: If the gain was attributable to long-term assets, then the preferential long-term capital gains tax rate see later discussion would apply. If the net gain was primarily from short-term assets, then it would be taxed at ordinary income tax rates. In other words, the multitude of seemingly disparate techniques for reducing the tax burden generated by various transactions can be classified into groups of tax strategies. Why tax plan in the first place? It may seem obvious at first glance, but this is an important question, which is answered differently at different times, for different organizations and in different countries.

This is because tax planning requires changing operations, and doing so is not cost free, and the rewards are uncertain. Examples 1. Two targets appear attractive. The other is a computer software firm with equal returns, but no tax advantages.

Although the discounted cash flows appear higher for the first target, becoming a worldwide dominant software producer is not part of its strategic plan. Because management has little expertise in restaurants, returns may actually decline after the acquisition, making the software firm, despite the lack of tax advantage, a better choice.

The after-tax value-added is significant, so the subsidiary should be kept. However, managers of other Southeast Asian subsidiaries are convinced that, if anything, the tax rate will increase because of political pressures. Management should anticipate that the rate will increase and adjust the expected rate of return accordingly. Because the options are tax-favored, the manager may find the options very attractive.

The small firm has used tax benefits to negotiate. Before accepting the deal, management must determine what transaction costs are involved, for example, how much the investment bank will charge for its services so that it can determine whether the transaction will result in value-added. Tax rates are scheduled to increase in the next year.

Thus, tax deductions for future depreciation will have more cash value. Accordingly, management anticipates the changing tax rates and structures the transaction to acquire the machinery early in the next year. Because of tax-accounting rules, both costs and revenues are not recognized until the second year. Instead of reroofing, the firm repairs a part each year. Repairs are tax deductible, whereas a new roof must be capitalized; the firm has transformed a non-deductible cost into a deductible one.

Although we watch frequent additions, corrections, and amendments, they are rather like hanging meat on the skeleton of the brontosaurus; underneath, the structure remains the same. Stephens, Fundamentals of Federal Income Taxation o increase firm value, managers engage in transactions.

Of course, firm value can increase for other reasons. However, transactions must have occurred when firms acquire such assets, and it takes transactions to convert such assets into cash flow. Managers do things like download, sell, rent, lease, and recapitalize. If managers structure transactions such that each is value-maximizing, then by year-end the sum of such transactions will have maximized firm value.

However, note that each transaction has an uninvited third party: In strategic tax management, when a firm chooses transactions, it keeps tax management in mind. The firm looks to engage in transactions that maximize end-of-period value. Otherwise, even if the transaction is highly tax-advantaged, the firm should consider rejecting the transaction.

Next, the firm anticipates its future tax status and chooses the timing— this year or a future year—of the transaction. Taxes are also negotiated between the firm and the other entity. The firm attempts to minimize tax costs by transforming transactions being considered into ones with more favorable tax treatment.

For example, managers can work to restructure transactions that might generate nondeductible costs into ones where costs are deductible ones, or work to transform what would have been ordinary income into capital gain income. What is left, after taxes, is value-added to the firm.

Like taxes, valueadded often inures to the firm over time. Because it is a fundamental principle that cash inflows are more valuable now than later, tax management takes into account the time value of a transaction as well.

#1 – K. Lasser’s Deductions and Tax Breaks: Your Complete Guide to Everything Deductible

The time value of a transaction, after taxes and transaction costs, is what increases firm value in the future. One aspect of a transaction that affects value-added comprises transaction costs, such as sales commissions or attorney fees.

If the transaction costs exceed the net value, the transaction should be rejected. As explained previously, SAVANT is an acronym for strategy, anticipation, value-adding, negotiating, and transforming.

For a transaction to be properly tax managed and thus best increase firm value , managers should consider all of these aspects. As an extreme example, a firm could earn zero profits and pay no taxes, but this would be inconsistent with sound strategy.

In a business setting, strategy can be thought of as the overall plan for deploying resources to establish a favorable position. A strategic management imperative results from this analysis.

Startegy provides a vision of where the firm wants to go, typically represented by a mission statement. Such strategies typically boil down to doing things better, cheaper, or faster than the competition.

The operations focus has resulted in many firms reengineering the process by which they execute their business-level strategy. In its competitive analysis, the firm needs to understand whether it has a tax advantage or disadvantage in relation to its rivals. Corporate strategy focuses on diversification of the business.

Ideally, diversification strategies improve the structural position or process execution of existing units, or, in a new business unit, stresses competitive advantage and consumer value. International strategy focuses on taking advantage of corporate and business strengths in global markets. It requires an understanding of local countries and relies on working with foreign governments. How does effective tax management interact with strategy? For example, if a firm wants to acquire another business that is unrelated to its core competency, to obtain tax benefits e.

Put simply, if a firm is structured so that it has a more favorable tax status than that of its competitors, this can give the firm an overall cost advantage over its competitors.

Effective tax management is an important tool in obtaining this kind of competitive edge. See Example 2. Both a firm and its biggest competitor are thinking about acquiring new equipment. The firm can use this cost advantage to either download more equipment, cut prices and undercut the competitor , or invest in new projects.

It also can be used in developing new products, as discussed in Example 2. Taking a competitive analysis into account may be more effective, however. Both are contemplating major product research. However, where net profits as opposed to just expenditures are concerned, the net advantage goes to the NOL firm see Example 2. FIRM A: Taxmanagment firms adjust the timing of transactions in anticipation of expected tax changes.

Note that while tax law changes are debated before being enacted, many are applied retroactively. Firms adjust the timing of their transactions when they are certain of their future tax status, or when there is a known change in tax rules. For example, they might know that they have an NOL this year, which will be used next year. Anticipation and Certain Tax Changes Suppose it is known that tax rates will rise substantially next January.

If it is now December, the rate change can be anticipated. Examples of such tax management by timing abound. In December , U. Similarly, in anticipation of a rate increase on individuals, Disney CEO Michael Eisner exercised several million dollars in stock options in late to accelerate income into a lower-tax-rate-year.

At the corporate level, timing usually focuses on shifting income into lower-tax-rate years, and deductions into higher-rate years. Examples 2. If the firm waits until next year, it will receive no tax benefits. The corporation should adjust the timing of the sale so that it occurs next year. If the firm generates an NOL in the current year, and the loss can be carried back and used in its entirety in the previous years, the NOL should have only minor influence on how the firm adjusts the timing of its current income and deductions.

To see this, assume a large firm has an NOL that can be carried back and used in its entirety. Therefore, both its current taxable income and its tax rate are exactly zero. The expenditure could not be deducted until the next year, so the firm would lose the present value of a one year deferral.

Present value is a mathematical technique that can be used to quantify the benefit of being paid earlier. Here, the discounted value i. The point is: The presence of an NOL carryforward, particularly one that is large enough to remain unused for a number of years, has an impact on strategic tax planning. Anticipation and Uncertain Tax Changes The tax-managed firm can anticipate tax changes before they become official. For example, Ronald Reagan campaigned to be U.

In anticipation of the Reagan election and subsequent tax act, a number of firms delayed acquisitions of equipment from late to Employing this anticipation strategy entails assigning a probability to the likelihood of tax legislation being enacted.

Keep in mind, however, that the expected tax benefits of implementing this strategy would be reduced by any related transaction costs. In recent years, there have been other U. For the former, each year the credits have been renewed by Congress for a short period.

See Examples 2. Of course, the firm needs to consider whether the acceleration makes good business sense. The company is trying to decide whether to establish a Web site with servers in various states to capture some of these sales. A number of states have attempted to subject such sales to sales taxes. However, the U. Congress has enacted a moratorium that prohibits states from assessing such taxes this year. Therefore, the company may want to postpone Internet sales until next year, when the anticipated tax would be less.

At a minimum, a widespread reaction has supply-and-demand effects in some markets, causing a price change. Tax cuts cause prices to rise, and tax increases cause prices to fall. In this way, changes in market prices can mute the effects of tax policy.

The magnitude of price effects depends on a number of conditions. These include the elasticities of supply and demand and whether additional suppliers can enter the market this can occur to some degree in the long run. In practice, such elasticities may not be known, although marketing departments of large firms often have data on price sensitivities to their own products. The point here is that some sort of a price response is likely to occur no matter what types of goods, services, or investments receive the tax break.

A well-known example of the price effects of tax breaks is the case of municipal bonds. As noted in Chapter 1, because the interest income from them is tax free, the demand for municipal bonds is pushed up. Because they are typically sold in even-dollar increments e. Instead, the effect occurs indirectly. The stated interest rates are lower than those for comparable taxable bonds. This can easily be seen by comparing the yields of taxable bonds listed in The Wall Street Journal to the yields of state and local bonds listed in its Daily Bond downloader section.

If there is a tax increase on some goods, services, or investments, the opposite effect occurs: Prices drop. What do these price effects mean to managers? The astute manager should attempt to anticipate such price movements. There is a well-known principle in economics that the incidence of a tax or a tax benefit falls only in part on the entity directly affected by the tax.

This effect is shown in Exhibit 2. Looking at Exhibit 2. Market prices drop, too, so part of the tax increase is passed on to computer suppliers via lower prices. Suppliers can anticipate tax law changes as well.

However, for a supply curve to shift, existing suppliers must leave or additional suppliers must enter the marketplace, which typically occurs over a much longer time period than that for demand curve shifts.

As shown in Exhibit 2. Thus, part of the tax is effectively passed onto suppliers through a lower sales price. What will happen in the marketplace? Because more computers will be demanded, prices will go up, and part of the tax credit will be bid away to suppliers in the form of higher prices. The manager must anticipate such price changes in deciding whether to download or sell something that is subject to a change in tax rules. The more familiar managers are with the market, the more accurately they can anticipate and navigate through the price effects.

If there is a huge supply market e. A sharp manager would make a download very early on. However, if there is only one supplier say, Cray Supercomputers , price hikes might occur almost immediately as stockouts occur and marginal costs rise.

Thus, unless the manager can effectively negotiate see later discussion , much of the tax benefit will be lost when dealing in a private market. If the net present value of cash flows from a transaction are positive, then, over time, this will translate into positive financial earnings. Both typically enhance shareholder value and increase management compensation e.

There are 1 million shares of common outstanding. The cash flows and reported earnings are different just in terms of when they are reported. Note that cash flows will rarely exactly equal the sum of financial earnings changes over time; however, they will approximate it.

The point of this is the following: If managers maximize after-tax cash flows on each transaction, this will also maximize shareholder value, as measured by financial income. Therefore, discounted cash flow DCF analysis is critical in measuring whether a tax management method will increase firm value.

The formulas for present value and discounting, along with on-line calculators, can be found on the Internet. Most are at academic Web sites, such as: Holding tax rates and bases constant, tax management implies deferring income and accelerating deductions.

More formally, it is the net present value NPV of expected taxes which managers should work to minimize. This implies that not only cash flows, but also discounted cash flows, should be used in determining whether a transaction increases aftertax firm value.

Two common gain-deferral techniques used when planning for U. The first is the like-kind exchange. Governed by IRC Section it also is called a exchange. If a company sells assets e.

However, if the requirements of Section are met, a company that trades in the old for the new is allowed to postpone the tax on the old asset until the new asset is sold.

The basic requirement for this favorable tax treatment is that like-kind property must be exchanged: However, it will have not have enough after-tax cash to do this: On the other hand, if the firm exchanges the land for the plant, there is no tax on the land gain until the plant is sold. By using a exchange, the manager has saved the firm over half a million dollars. Of course, the seller of the plant must be willing to take the land in exchange, instead of just receiving cash.

However, the manager could find a third firm who might be a willing party to make the exchange, that is, acquire the plant for cash and trade it for the land. Such multipleparty exchanges are not uncommon, and there are well-organized markets for doing so. Another important tax deferral mechanism is the IRC Section involuntary conversion, which is important if a gain results when insurance proceeds are received because a firm had a property realty or personalty that was destroyed, seized, or stolen.

This can happen even if the firm uses the proceeds to replace the lost property. If the requirements of Section are met, however, taxes on the gain are deferred until the replacement property is disposed of. Managers do not plan to use Section per se: They do not burn down a plant in order to defer taxes.

However, if an involuntary conversion should naturally arise, Section is a valuable deferral technique. All Boise Cascade operations use capital in the form of such things as inventories, equipment, computers, real estate, receivables, timberland, or timber deposits. EVA is an effective measure of increases or decreases in shareholder value, and it is becoming a barometer the investment community uses to evaluate how well Boise Cascade and other companies are performing.

Boise Cascade Annual Report. DCF information especially on individual projects is rarely communicated directly to outsiders, they must usually rely on measures of performance that can be constructed from publicly available financial statement data.

Managers thus need to know how transactions affect such measures. EVA has become increasingly popular. Accordingly, even if a transaction minimizes taxes, it may be poor tax management if it decreases EVA. EVA can be decreased by lower after-tax operating profits, using more capital, or using more expensive capital. Because of the tax benefits of accelerated depreciation, assume there is no tax on the increased earnings. However, before a definite decision on the new plant can be made, there should be an NPV analysis to consider multiperiod effects such as tax depreciation becoming smaller in later years.

Suppose that, when added together, the new plant had a positive NPV. Closely related are explicit contracts based on financial accounting information. The company may have debt covenants tied to certain financial ratios, and a transaction, while saving taxes, might be detrimental in this regard.

Other contracts based on financial accounting could be with managers e. To see this, refer to Example 2. Suppose that you are the CFO of the corporation and are trying to decide whether to invest in the raw land.

Corporate Tax Planning & Business Tax Procedures with Case Studies

Use NPV, but also consider any important financial statement measures and financial statement-derived contracts. If a firm never expects to pay a tax on some income, then for financial-reporting purposes, it will not show a tax expense.

Such permanent differences are the best of all worlds: Although a number of such examples of permanent differences under U. This results in accounting earnings that are not reduced by a provision for U. More common than such permanent differences are temporary differences. These occur when the only difference in actual taxes paid and the related tax expense on the financial statements is the period in which they occur.

That is, there are only timing differences.

Corporate Tax Planning & Business Tax Procedures with Case Studies

These result from differences in allowable methods in financial versus tax accounting. One important example is depreciation. Some countries, however, allow accelerated depreciation methods for tax purposes. As an example, let the following occur in a year: That is, the timing difference will reverse.

What is the implication for tax management? Because timing differences are numerous and difficult to schedule, managers do not generally worry about them. However, permanent differences are preferred because they can have an immediate and predictable effect on earnings.

Adjusting Value-Adding for Risk Both business risks and the risks of tax law changes should be taken into account for effective tax management.

A full discussion of risk management is beyond the scope of this text. However, three well-known risk-management techniques are diversification, insurance, and receiving a risk premium.

All three can be effectively obtained by using the tax law. A risk premium is the discount in download price that a manager would have to be offered to accept a risky project.

If the manager is risk averse most people are , she will select project A. Only if the download price of B is lowered i. There is another related tax, too: the generation skipping transfer tax. Both of these taxes are imposed on the transferor of property, not on the recipients, and are based on the fair market value of the property transferred.

In addition, both use the same tax rates. For more information on this and other topics, check Web sites mentioned previously, like www. The intent of these taxes on gratuitous transfers of property is not so much to raise revenue as to try to prevent excessive concentrations of hereditary wealth. In doing so, these taxes help provide additional vertical equity in the tax system beyond that provided by the income tax.

That is, estate and gift taxes attempt to impose additional taxes on wealthier individuals. Both taxes are steeply progressive, which means that tax rates increase as the tax amount increases. Note that there are no U. In addition, recipients do not pay income taxes on gifts or inheritances, nor are income taxes imposed on givers when appreciated property is transferred.

The gift tax is imposed on individuals who transfer property in a bona fide gift.

A bona fide gift has a donative intent, with no strings attached to the recipient. That is, it is not a disguised sale or form of compensation. There are numerous exceptions to the tax, making its payment fairly rare. The most important exemptions are for transfers of property between spouses both during marriage and upon divorce and most donations to public institutions such as charities, universities, and churches which also are exempt from income tax.

In addition, small gifts are not taxed. The annual exclusion is a simple tax-planning method that can be used to avoid taxes when large gifts are given in installments.

See Example 1. What are the gift tax consequences? The donation to the church is not subject to tax. Like the income tax, gift taxes are calculated and paid annually. Unlike the income tax, the gift tax is a lifetime tax, which is figured by including in the amount subject to gift tax for a year—the gift tax base—both the taxable gifts made during the year and all taxable gifts made in prior years but only those since , when the current unified system was enacted.

However, prior gifts are not double-taxed. That is, every dollar of taxes on gifts made in prior years offsets a dollar of taxes calculated for the current year.

Because of the progressive rate structure, which results in increasingly higher rates in each successive year until the top bracket is reached. Another credit—the unified credit—assures that most people never actually have to pay gift taxes. This is being done partly by reducing tax rates and partly by raising the unified credit. Thus, although the taxes disappear in , they will reappear in unless the changes are extended sometime before then. The changes were enacted in an atmosphere of large budget surpluses projected over many years.

Budget deficits are now projected, suggesting that federal taxes may be raised, directly or indirectly, in the near future. Although the credit can be used in pieces over a period of years, the total credit is not renewed every year.

The estate tax is imposed on the net taxable estate of someone who dies. The most important deduction is for property left to a surviving spouse. Because of this, the estate tax is effectively a tax on the joint life of a married couple. Deductions also are allowed for contributions to be made out of the estate to qualified public institutions i.

The combined estate and gift tax is a lifetime tax. Although prior taxable gifts are included in the amount subject to the estate tax i. That is, every dollar of prior gift tax offsets a dollar of estate tax. Because of the progressive estate tax structure, the effect is to tax property passed at death—effectively the last gift people can make—at the highest possible estate tax bracket. To reduce double taxation—once by the Federal government, and a second time by state governments—there is a credit for state estate or inheritance taxes paid.

More important, the unified credit assures that most people never pay an estate or gift tax. Jones dies in , leaving behind a wife and a son. He has made no prior taxable gifts. A Framework for Understanding Taxes 13 Income Taxes on Individuals In the United States, individuals pay a national personal income tax on taxable income received during the year.

More details are available on the Web, e. As discussed later, most states and some cities also impose a personal income tax modeled after the national system albeit at lower tax rates. For individuals, this typically includes salaries and wages including year-end bonuses , dividends, interest, rents, royalties, distributions from retirement accounts, and gains net of losses on the sales of assets. Both of these are subject to a phase-out for higher income taxpayers, the details of which are not important here but can be found at sites like www.

The first class comprises personal and dependency exemptions. The taxpayer receives a tax deduction for self, spouse if married , and for each dependent.

Basically, a dependent is a low-income person being supported by the taxpayer. Whether someone qualifies depends on a five-pronged test, which is surprisingly complex. Itemized deductions fall into six classes: 1.

Filing status is important because it also determines the level of tax rates. Married filing jointly has the lowest, followed by head of household and single. An exception is for net longterm capital gains, which is one of the most complex areas of U. Indeed, one of the longest sentences in the U. Consisting of over words, it is 26 United States Code U. Section e 1.

Pradip Kumar Sinha is an M. London , A. At present, Dr. Chapter Preview. Student Dollar Price: Book Edition: Of Pages: Book Weight: About The Book. About The Author.

Book Reviews. Kumardatta A. Ganjre Dr. Prafulla Pawar. Rural Marketing Dr. Ravindranath Badi Prof.Against this background, the EATLP Congress devoted to corporate income tax subjects was designed to enhance the main similarities and differences that exist between many countries European countries and the United States. Taxes seem to be everywhere, and triggered by a bewildering array of activities, but how is strategic tax planning important to people who do not devote their lives to tax consulting?

They are not deductible for tax purposes. In this way, changes in market prices can mute the effects of tax policy. Shifting involves techniques that move amounts being taxed also called the tax base to more favorable tax-accounting periods. Anticipation and Uncertain Tax Changes The tax-managed firm can anticipate tax changes before they become official. More details are available on the Web, e.