Term Paper: Entrepreneurs Should Know About Federal

Pages: 5 (1455 words)  ·  Bibliography Sources: 0  ·  Level: College Senior  ·  Topic: Business  ·  Buy This Paper

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[. . .] Basically, the corporation must derive 60% or more of its earnings through passive income, where five or fewer individuals own more than 50% of the value of the stock. The personal holding company tax rate is 39.6% of the corporation's undistributed earnings, and is in addition to the regular corporate income tax.

Tax Planning

For corporations, tax planning is an extremely important aspect of running a business. Tax planning involves analyzing a variety of tax options to determine when, whether, and how to conduct business transactions so that taxes are eliminated or reduced. Business owners often have the option of completing a taxable transaction by more than one method. The courts strongly support the rights of business owners to choose the course of action that will result in the lowest legal tax liability. In other words, tax avoidance is totally legal. On the other hand, tax evasion, which includes the reduction of tax through deceit, subterfuge, or concealment, is completely illegal.

In many cases, tax evasion is differentiated from tax avoidance when the IRS discovers fraudulent intent on the part of the business owner. The following are four red flags that the IRS looks for when researching possible fraud: failure to report large amounts of income, such as a shareholder's failure to report dividends; claims for improper deductions on a return, such as a corporation's large deduction for charitable contributions that cannot be proved; accounting irregularities; and improper allocation of income.

Accounting Methods and Periods

Every corporation must use a consistent accounting method, which sets rules for determining how and when to report income and expenses. The most frequently used accounting methods are the cash method and the accrual method.

Under the cash method, income is usually reported in the tax year it is received and expenses are deducted in the tax year they are paid. Under the accrual method, income is usually reported in the tax year its is earned, regardless of when payment is received, and expenses are deducted in the tax year they are incurred, regardless of when payment is made.

A good accounting system is essential to a successful business as it helps to cut costs in the long run and avoid tax problems. Estimated or approximate deductions are not acceptable to the IRS. A corporation must be able to prove all business expenses with timely and accurate records to support the amounts deducted to compute its net profit. A good accounting system is extremely helpful in this tax issue.

Taxable income is calculated on the basis of a tax year, which is an annual accounting period for keeping records and reporting income and expenses. The two forms of tax years are calendar years and fiscal years. Corporations adopting a calendar year must maintain its books and records and report its income and expenses from January 1 through December 31 of each year. A fiscal year is 12 consecutive months ending on the last day of any month except December. A tax year is a fiscal year that varies from 52 to 53 weeks.

Tax and Wage Reporting

Any corporation with employees is responsible for several federal taxes. Some of these taxes apply to employers, some are the responsibility of employees, and some apply to both employers and employees. Employment taxes include federal income tax withholding; social security and Medicare taxes; and federal unemployment tax act (FUTA) tax.

Corporations are also responsible for timely payment or deposit of the employment taxes withheld from employees, matching shares of social security and Medicare taxes, and any federal unemployment tax act (FUTA) tax. The employer's share of the social security, Medicare, and all of the FUTA tax deposits are deductible.

Conclusion

Adam Smith believed that there should be limitations on what corporations should and shouldn't be allowed to get away with. He pinpointed a solution to the complex nature of taxes -- a simple and fair system that minimizes compliance and administrative costs. The U.S. tax code has one of the most complex tax codes in the world, which has become a burden on its economy. Smith's ideas should be used by the U.S. To design a tax code that would ease the collection burden and force interest groups to look for money elsewhere.

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Entrepreneurs Should Know About Federal.  (2002, November 5).  Retrieved May 23, 2019, from https://www.essaytown.com/subjects/paper/entrepreneurs-know-federal/4347485

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"Entrepreneurs Should Know About Federal."  Essaytown.com.  November 5, 2002.  Accessed May 23, 2019.
https://www.essaytown.com/subjects/paper/entrepreneurs-know-federal/4347485.