General Taxes Fourgeneraltypesofbusinesstaxes. 1. IncomeTax 2. SelfEmploymentTax 3. EmploymentTaxes 4. ExciseTax q IncomeTax 1 Youmustpaythetaxasyouearnorreceiveincome duringthe year.Anemployeeusuallyhasincometaxwithheldfromhisor herpay.Ifyoudonopayyourtaxthroughwithholding,ordo notpayenoughtaxthatway,youmighthavetopayestimated tax.

q EmploymentTaxes Whenyouhaveemployees,youastheemployerhavecertain employmenttaxresponsibilitiesthatyoumustpay andforms youmustfile.Employmenttaxesincludethefollowing: SocialsecurityandMedicaretaxes Federalincometaxwithholding Federalunemployment(FUTA)tax

q Aconsumptiontax Aconsumptiontaxisataxleviedonsalesofgoodsor services. Themostimportantkindsofconsumptiontaxesaregeneral salestaxes,excisetaxes,valueaddedtaxes,andtariffs. q Ageneralsalestax Generalsalestaximposesthesametaxrateonawidevariety ofgoodsand,insomecases,services. In US,statesandlocalgovernmentsimposeageneralsalestax. Thereisnonationalgeneralsalestax.Statesalestaxesrange from3to7percent,andlocalsalestaxesrangefromafraction of1percentto7perce q ExciseTaxes Federal,state,andlocal governmentslevyexcisetaxes,which aresalestaxesonspecificgoodsorservices.Excisetaxesare alsocalled selective salestaxes. (e.g.Tobacco,Alcohol) q ValueAddedTax VATisjustageneralsalestaxthatiscollectedatmultiple stages. FavoredinEurope Sellerpaysthegovernmentapercentageofthevalueaddedto goodsorservicesateachstageofproduction.Thevalueadded ateachstageofproductionisthedifferencebetweenthe sellerscostsformaterialsandthesellingprice. qTariffs Tariffs,alsocalleddutiesorcustomsduties,aretaxesleviedon importedorexportedgoods. q Propertytax 2 Propertytaxesisataxonanindividualswealth ,notablyreal 3 estate . q Estatetax Anestatetaxisataxonthedeceasedpersonsestate,which includeseverythingthepersonownedatthetimeofdeath money,realestate,stock,bonds,proceedsfrominsurance policies,andmaterialpossessions q Inheritancetax Aninheritancetaxalsotaxesthevalueofthedeceased personsestate,butaftertheestatepassestoheirs.

q SelfEmploymentTaxes Selfemploymenttax(SEtax)isasocialsecurityandMedicare taxprimarilyforindividualswhoworkforthemselves. q ExciseTaxes Excisetaxesgenerallyaretaxesleviedonyouifyourbusiness doesanyofthefollowing: Manufactureorsellcertainproducts. Operatecertainkindsofbusinesses. Usevariouskindsof equipment,facilities,orproducts. Receivepaymentforcertainservices.

BusinessTaxes: q PayrollTax Whereasanincometaxisleviedonallsourcesofincome,a payrolltax appliesonlytowagesandsalaries.Employers automatically withholdpayroll taxesfromemployeeswages andforwardthemtothegovernment.Payrolltaxesfund: Socialinsuranceprograms Programsthatbenefitthepoor,elderly,unemployed,and disabled.

Incomeincludeswages,salaries,andotherearningsfrom onesoccupation;interestearnedbysavingsaccountsand certaintypesofbonds;rents(earningsfromrentedproperties); royaltiesearnedonsalesofpatentedorcopyrighteditems, suchasinventionsandbooks;anddividendsfromstock. Incomealsoincludescapitalgains,whichareprofitsfromthe saleofstock,realestate,orotherinvestmentswhosevaluehas increasedovertime.

Wealthisthevalueofallofthepersonsassets,bothfinancial (suchasstocksandbonds)andreal(suchashouses,cars,and artwork 3 Inpractice,propertytaxesareusuallymorelimited.Inthe UnitedStates,stateandlocalgovernmentsgenerallylevy propertytaxesonbuildingssuchashomes,officebuildings, andfactoriesandonland.

uFOUR BASIC TASKS FOR TAX COMPUTATION: 1. Computeadjustedgrossincomeonesincomefromall taxablesourcesminuscertainexpensesincurredinearning thatincome. 2. Convertadjustedgrossincometotaxableincome incomesubjecttotax subtractvariousamountscalled 4 exemptionsanddeductions . 3. Calculatestheamountoftaxduebyconsultingataxtable orrateschedule,whichshowstheexactamountoftaxdue formostlevelsoftaxableincome. 4. Subtracttaxes paidduringtheyearandanyallowabletax creditstoarriveatfinaltaxliability.

Distributions Actualdistributionsofprofits,asopposedtodistributive shares,typicallyhavenoeffectonshareholdertaxliability.

Inotherwords,ashareholder'sproratashare,ordistributiveshare,oftheS
corporation'sprofitiswhatgetstaxednotthemoneypaidouttothe shareholder.However,adistributiontoashareholderthatisinexcessofthe shareholder'sbasisinhisorherstockistaxedtotheshareholderascapital gain.

TaxationofSCorporationDistributiveShare WhileanScorporationisnottaxedonitsprofits,theownersof anScorporationaretaxedontheirproportionalsharesoftheS corporation'sprofits.

SCorpTaxesFAQs Generally,thecorporationmustmakeestimatedtax paymentsforthefollowingtaxesifthetotalofthesetaxes ismorethananamountspecifiedbylaw: 1. Taxoncertaincapitalgains, 2. Taxonbuiltingains, 3. Excessnetpassiveincometax,and 4. Investmentcreditrecapturetax. BecauseincomefromanScorporationistaxedatonlyone levelratherthantwo,yourtotaltaxbillwilllikelybeless. Businessmayhaveanoperatinglossthefirstyear.Withan SCorp,yougenerallycanpassthatlossthroughtoyour personalincometaxreturn,usingittooffsetincome ShareholderspayincometaxontheirshareoftheSCorp profitsregardlessof whethertheyactuallyreceivedthe moneyornot.IftheSCorpsufferedaloss,shareholders canclaimtheirshareofthatloss. Youcandeductlossesonyourpersonalreturnonlytothe extentofthemoneyyouputintothecorporation(tobuy stock)and anymoneyyoupersonallyloanedtotheSCorp. InterestyouincurtobuySCorpstockispotentially deductibleasaninvestmentinterestexpense

Example:WidgetsInc,anSCorp,makes10,000,000innetincomeandis
owned51%byBoband49%byJohn.OnBob'spersonaltaxreturn,hewill report5,100,000inincomeandpaytaxesonthisincome.Johnwillreport 4,900,000ofincomeonhispersonal1040returnandpaytaxesonthisincome. Ifforsomereason,Bob(asthemajorityowner)decidesnottodistribute the money,bothBobandJohnwillstillowetaxesontheirdistributiveshares,even thoughneitherreceivedanycashdistribution.(Typically,Scorporationsuse shareholderagreementsthatstipulateatleastenoughdistributionmustbe madeforshareholderstopaythetaxesontheirdistributiveshares.)Theywill alsoberequiredtopaytheirFICAtax,currently15.3percent,onanysalary paid,followingtherulesoftheFICATax.Keepingitsimple,we'llassumethey bothpaythemselves94,200.TheirFICATaxliabilitywillbe14,412each.The distributionoftheadditionalprofitsfromtheSCorpwillbedoneFICATax Free.Theirtotaltaxsavingswillbeapproximately603,000,or6.15%oftheir incomeminustheirsalaries.

Californiastatetaxes Scorpspayafranchisetaxof1.5%ofNetIncomeinthestate ofCalifornia. THESTUDYOFTAXES Tounderstandtheeffectofanytax,determinewhobears theburdenofthetax Whenthegovernmentleviesataxonagood/service,it distortsconsumerbehaviorpeoplebuyless. ATaxinducedchangeinbehavioriscalledanexcess burden Agoodtaxsystemshouldbeefficient,wastingaslittle moneyandresourcesaspossible. Measuresofefficiency: 1. Administrationcosts, 2. Compliancecosts 3. Excessburden. PrinciplesofFairnessinTaxes: Abilitytopayprinciple holdsthatpeoplestaxes shouldbebasedupontheirabilitytopay,usuallyas measuredbyincomeorwealth Benefitsprinciple oftaxationstatesthatonlythe beneficiariesofaparticulargovernmentprogram shouldhavetopayforit.

FICA TheFICAtaxneedonlybepaidonemployeewagesandnoton distributiveshares.

BecauseFICAtax isavoidedondistributiveshares,theIRSandequivalent staterevenueagenciesmayrecategorizedistributionspaidtoshareholder employeesaswagesifshareholderemployeesarenotpaidareasonablewage fortheirpositionwithinthecompany.

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Otherdeductionsareallowedtoencouragecertainkindsof behavior.Forexample,somegovernmentspermitdeductions ofcharitablecontributionsasanincentiveforindividualsto givemoneytoworthycauses.