Ch 01 Part 1 ADJ

Chapter 1 : 

Chapter 1 Understanding and Working With the Federal Tax Law Copyright ©2009 Cengage Learning Corporations, Partnerships, Estates & Trusts

Competing Objectives Result in a Complex Law Structure : 

Competing Objectives Result in a Complex Law Structure Revenue Needs Economic Considerations Social Considerations Equity (Fairness) Considerations Political Considerations

Economic Considerations(slide 1 of 2) : 

Economic Considerations(slide 1 of 2) Control the economy (e.g., favorable depreciation deductions for purchase of business property) Encourage certain activities (e.g., research and development deductions and credits)

Economic Considerations(slide 2 of 2) : 

Encourage certain industries (e.g., agriculture and natural resources incentives) Encourage small business (e.g., ordinary loss deduction on stock in small business) Economic Considerations(slide 2 of 2)

Social Considerations (slide 1 of 2) : 

Social Considerations (slide 1 of 2) Tax-free medical coverage provided by employers to encourage health insurance Deferred tax treatment of certain retirement funds to encourage saving for retirement

Social Considerations (slide 2 of 2) : 

Deduction for charitable contributions to encourage funding of socially desirable programs by private individuals and companies Disallowed deductions for expenditures against public policy (e.g., illegal bribes, kickbacks) Social Considerations (slide 2 of 2)

Equity Considerations(slide 1 of 4) : 

Equity Considerations(slide 1 of 4) Alleviate the effect of double taxation: Deduction for state and local taxes Credit or deduction for certain foreign taxes Deduction for dividends received by corporations to prevent triple taxation

Equity Considerations(slide 2 of 4) : 

Wherewithal to Pay concept Defers taxation when a taxpayer’s economic position has not changed e.g., Exchange of assets might result in gain but no cash, so some tax may be deferred Equity Considerations(slide 2 of 4)

Equity Considerations(slide 3 of 4) : 

Annual accounting periods In some cases, e.g., start-up businesses, a revenue-generating cycle may be greater than the 12 month maximum tax reporting period. To accommodate this, net operating loss rules allow losses from one year to be used in another year. This minimizes the adverse impact of arbitrary reporting periods. Equity Considerations(slide 3 of 4)

Equity Considerations(slide 4 of 4) : 

Inflation adjustments are included in tax rate schedules. If earnings increase solely by cost-of living amounts, taxes will not be imposed at higher rates on the increase. Equity Considerations(slide 4 of 4)

Political Considerations : 

Political Considerations Special interest legislation Response to public opinion (political expediency) State and local influences