Taxation

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Introduction to Taxation

Chapter 1

Taxation (34221) Prepared by: Radhi Hamadeen Dept. of Accounting , PSUT 2015
Outline
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Tax Definition
Why to impose Taxes?
The Structure of Taxes (Tax Terminology)
Types of Taxes
Income Taxation of Business Entities

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Key Objectives
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By the end of this Chapter, students should be

able to:

Define Tax,
Distinguish different types of Taxes,
Understand the concept of Income Tax,
Distinguish different types of business entities
and how they should be treated for taxation

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Definition of Tax
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Tax originally from the Latin taxo: I estimate
Taxing is to impose a financial charge or other levy
upon a taxpayer (an individual or legal entity) by a
state or the functional equivalent of a state such that
failure to pay is punishable by law.

A compulsory contribution to state revenue, levied

by the government on workers' income and business
profits or added to the cost of production.

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Tax Definition Cont.
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A tax "is not a voluntary payment or

donation; it is an enforced contribution

Tax may holds different names such as: toll,

tribute, gable, impost, duty, custom, excise,
subsidy, aid, supply, or other name.

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 Why to Impose Taxes?
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Money provided by taxation has been used by states to
carry out many functions, these include:
the enforcement of law and public order,
protection of property,
economic infrastructure (roads, legal tender, enforcement of contracts, etc.),
public works, social engineering,
the operation of government itself,
fund welfare and public services.
pay off the state's debt and the interest this debt accumulates,
fund education systems, health care systems, pensions, unemployment
benefits, and public transportation, and
Energy, water and waste management systems are also common public
utilities.

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The Structure of Taxes (Tax Terminology)
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Taxes have two components: tax rate and tax base

Tax Rates Can be structured to yield:

1. Proportional tax: the rate of tax remains constant

over the tax base (sales tax);

2. Progressive tax: tax rates increase as the tax base

grows larger (Federal income, gift & estate tax);

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The Structure of Taxes (Tax Terminology)
Cont
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3. Regressive tax: tax rates decrease as the tax

base grows larger (Federal employment taxes).

4. Lump-sum tax: is a tax that is a fixed

amount, no matter the change in circumstance
of the taxed entity.
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The Structure of Taxes (Tax Terminology)
Contd
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Tax Base: Most taxes are levied on one of the following
tax bases:
1. Transactions (including sales and transfers of wealth);
2. Property or wealth (including real estate taxes and
ownership of property);
3. Privileges and rights (including the ability to use the
corporate form or to be in certain professions, excise taxes, and
custom duties);
4. Income (can be on gross or net income).

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Types of Taxes
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Income Tax
Taxes on the Production and Sale of Goods,
this includes for example:
- excise tax levied on specified commodities
e.g. oil, tobacco, phone services;
- sales and use tax major source of income
for a state; items subject to tax are varied
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Types of Taxes Contd.
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- Value Added Tax (VAT) - a sales tax levied on
the value added at each stage of production
Employment Taxes - these taxes include
- FICA taxes (Federal Insurance Contributions Act)
social security and medicare;
- FUTA (Federal Unemployment Tax Act) a
regressive tax being paid by employer (e.g. 6.2% of
the first $7000 of wages US)

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Types of Taxes Contd.
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Death Taxes
Gift Taxes
Property Taxes
Taxes on Privileges and Rights (custom
duties; franchise and occupational; severance
extraction of natural resources)

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Income Taxation of Business Entities
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Proprietorships:
- Simple form of business is not a separate entity
from the individual owner;
- Profits are reported on the taxpayers personal return.
Corporations:
- separate legal entities. Most corporations are
separate taxable entities, called C corporations or
regular corporations.

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Income Taxation of Business Entities Contd
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Partnerships:
- While required to file a return, a partnership is not
a separate taxable entity and is not subject to
taxation.
- The financial results of the partnership
flow-through to the partners and are reported on
their tax returns.
Limited Liability Companies & Partnerships
These entities follow the same tax rules as partnership
End of Chapter 1 14