...What is a liability? The answer might seem rather obvious: an amount owed from one entity to another. If the liability bears interest, how is interest expense measured? The simple answer is that interest expense is equal to interest paid. However, life can get a lot more complicated: Does a liability exist if there is no legal liability, but the company has announced a particular commitment or plan of action? How is a liability measured if the obligation is for services, not a set amount of money? How can a liability be measured if the amount of cash to be paid is uncertain? How should a liability be valued if the stated interest rate does not reflect the market interest rate? How is interest expense measured if the stated interest rate does not reflect the market interest rate? When is interest part of the cost of an asset instead of an expense? Liability financing is an integral part, perhaps even a dominant part, of the capital structure of many companies. For example, Shaw Communications Inc. reported total assets of $8.9 billion in 2009. Of this amount, only $2.5 billion is financed through shareholders' equity, with the balance, $6.4 billion, provided by debt in various forms. A sizeable portion of the debt is unearned revenue and deposits ($0.8 billion, or 9% of total assets) and long-term debt is 35% of total assets. Interest expense is reported at $237 million, eating up a significant portion of the reported $956 million in operating earnings. Appropriate...
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...Chapter 15 Entities Overview SOLUTIONS MANUAL Discussion Questions 1. [LO 1] What are the more common legal entities used for operating a business? How are these entities treated similarly and differently for state law purposes? Answer: Corporations, limited liability companies (LLCs), general and limited partnerships, and sole proprietorships. These entities differ in terms of the formalities that must be observed to create them, the legal rights and responsibilities conferred on them and their owners, and the tax rules that determine how they and their owners will be taxed. 2. [LO 1] How do business owners create legal entities? Is the process the same for all entities? If not, what are the differences? Answer: The process of creating legal entities differs by entity type. Business owners legally form corporations by filing articles of incorporation in the state of incorporation while business owners create limited liability companies by filing articles of organization in the state of organization. General partnerships may be formed either with or without written partnership agreements, and they typically can be formed without filing documents with the state. However, limited partnerships are usually organized by written agreement and must typically file a certificate of limited partnership to be recognized by the state. 3. [LO 1] What is an operating agreement for an LLC? Are operating agreements required for limited liability companies? If not...
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...unincorporated business with one owner who pays personal income tax on profits from the business. With little government regulation, they are the simplest business to set up or take apart, making them popular among individual self contractors or business owners. The benefit of the sole proprietorship is the tax advantage. The disadvantage of a sole proprietorship is obtaining capital funding. - Liability: The owner is personally liable for claims against the business. If a sole proprietorship losses a lawsuit or otherwise finds itself in debt, not only will the business be liable for the debt, but the owner will be as well. - Income Taxes: As a sole proprietor...
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...the highest federal corporate income taxes in the world, enticing corporations to outsource where more favorable tax rates lie. Will lowering this corporate tax rate help bring back those jobs to the U.S. and decrease the growing unemployment rate? Some argue yes, while other experts say no. While we argue both sides of this topic, the goal of this paper is to leave you, the reader, with enough facts to form your own opinions to the above question. How The Income Tax Came To Be In order to learn how the current corporate tax rates came to exist, we must first look at the history of the income tax. Although the Revenue Act of 1894 established the principle of taxing corporations separate from their owners, a federal tax on corporate income was never imposed until 1909. The Revenue Act levied a 2% income tax on any incomes totaling more than $4000 in order to make up the lost federal revenue (Dierdrich 2011). In the next year, the U.S. Supreme Court deemed the Act unconstitutional saying it was not allocated according to the population size of each state. How did Congress work around this? With the same principles in mind that lie within the Revenue Act of 1894, Congress passed the Corporation Excise Tax Act in 1909 (2013). Apart from its predecessor, this Act imposed a 1% tax on corporate income totaling more than $5000 (Tax Foundation 2013); however, it wasn’t until 1913 and the creation of the 16th amendment, which allows Congress to levy an income tax not apportioned to...
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...is not possible on an individual level but, however, is possible with regards to large corporations in the United States. Every day, through a process known as corporate inversion, large corporations from the United States take advantage of a loophole in the US tax code that allows them to get out of paying their corporate income taxes to the US. Do any of the potential benefits that corporate inversion might actually bring outweigh any of the potential costs? I believe that large corporations moving their headquarters to another location outside of the US to avoid corporate...
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...National Tax Journal Vol 49 no. 3 (September 1996) pp. 421-35 CORPORATE TAX COMPLIANCE AND FINANCIAL REPORTING CORPORATE TAX COMPLIANCE AND FINANCIAL REPORTING LILLIAN F. MILLS * Abstract - The tax law provides varying opportunities for tax planning, and firms have competing incentives to consider in planning a tax reporting strategy, including financial reporting effects. I present preliminary results that Internal Revenue Service audit adjustments increase in the excess of book income over taxable income. This is evidence that firms incur additional costs for reporting higher book income than taxable income. I also investigate the relationship between compliance costs and taxes paid. Existing descriptive research emphasizes the social cost burden of such compliance costs. Preliminary results indicate that firms that spend more on tax research and planning report lower tax expense. results that proposed Internal Revenue Service (IRS) audit adjustments increase as the excess of book income over taxable income increases. This is evidence that firms incur additional costs for reporting higher financial statement income than taxable income. I also investigate how the level of conformity varies as the relative incentives for book income versus tax savings change. Tax regimes that require more conformity between book and tax accounting will likely induce higher tax payments than those firms whose incentives to maintain high book income are the greatest. In addition, government...
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...The Balance Sheet, 2-11 The Income Statement and 2-24 The Statement of Cash Flows Problem 1.1 The most important difference between a corporation and all other organizational forms are corporation is considered by law to be a unique legal entity, separate and apart from its owners, they are responsible for their own liability and business debts, and therefore shareholders’ liability is normally always limited to the amount of money they paid for their shares. A corporation can be taxed; it can be sued; it can enter into contractual agreements. A corporation also pays its own taxes at the corporate income tax rate and files its own corporate tax forms each year. Moreover, Corporations cannot deduct dividends from business income. Problem 1.2 Limited liability mean their liability is limited to their investment and limited liability companies means a limited partnership without a general partner. Problem 1.3 Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners Problem 1.4 Advantages: * Limited liability and perpetual life * Stockholders, directors, officers are typically not liable for the company’s debts and obligations * In the US, corporations are generally taxed at lower rate Disadvantages: * High cost * Must follow complex rules and regulations than others * Have to pay double tax Problem 1.5 The difference...
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...ASSIGNMENT For The Partial Fulfillment of the Course, COURSE: TAXATION (ACN-4135) SUBMITTED TO, PROF. DR. SWAPAN KUMAR BALA, FCMA SUBMITTED BY, ISMAT JERIN CHETONA ID-111083068 SEC: B UNITED INTERNATIONAL UNIVERSITY DATE OF SUBMISSION: 31st DECEMBER, 2011 CORPORATE TAXATION IN BANGLADESH FISCAL ENVIRONMENT OF STOCK MARKET IN BANGLADESH FISCAL ENVIRONMENT OF STOCK MARKET IN BANGLADESH The share market in a country is the engine of raising capital, which accelerates industrialization and the process of privatization. Share market means the share and stock markets of the country. It is a market for long term fund. With the emergence of the need for infrastructural development projects, for setting up of new industries for entrepreneurial attempts-now there are more frequent needs of funds. Participants in the share market are many. They include the commercial banks, saving and loan associations, credit unions, mutual saving banks, finance houses, finance companies, merchant bankers, discount houses, venture capital companies, leasing companies, investment banks & companies, investment clubs, pension funds, stock exchanges, security companies, underwriters, portfolio-managers, and insurance companies. The main market participants are: ▪ Investors ▪ Brokers ▪ Dealers ▪ Underwriter ...
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...Chapter 9 Taxation: Income and Wealth Classification of Taxes on Income and Wealth: 1. the personal and corporate income taxes; 2. the transfer taxes, namely, the estate and inheritance taxes; 3. the real property tax on realty used for personal purposes; 4. the individual residence tax, both basic and additional; 5. the tax on motor vehicle used for personal purposes; 6. the immigration tax; 7. firearms license fee; 8. hunting permits; and 9. social security contributions, both of private and public employees. Arguments for Taxes on Income and Wealth Taxation is a fiscal tool of government for the achievement of economic, sometimes non-economic, goals. GOALS: 1. maximum freedom for choice, consistent with the welfare of others; 2. optimum standards of living, in terms of available resources and techniques; 3. an optimum rate of economic growth; and 4. distribution of income in conformity with the standards of equity currently accepted by society. Characteristics of Tax System Economic effects. – The tax structure must be established in such a way as to avoid interference with the attainment of the optimum allocation and use of resources and where possible, to assist in the attainment of the optimum. Equity. – The distribution of the tax burden must conform to the pattern of income distribution regarded as the optimum by the consensus in contemporary society. Minimum costs of collection and compliance, consistent with effective enforcement....
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...Louisiana Tax Reform: Eliminating Corporate and Franchise Taxes The relationship between tax policies and economic growth is a topic that has been frequently debated. For decades, economists have developed studies exploring this relationship and analyzing its effects. These studies concluded that a negative relationship exists between taxes and economic growth. Taxes have a negative impact on economic growth because of how they influence the activities individuals and firms choose to engage in. Businesses and individuals often base their decisions on the overall tax burden, which creates a disincentive to engage in activities taxed at a higher rate. The Tax Foundation evaluates each state’s business tax climate every year in order to indicate which states’ tax systems are the most attractive to business and economic growth. According to the Tax Foundation’s 2013 State Business Tax Climate Index, Louisiana’s tax system is currently ranked 32nd, far below the rankings of progressive southern states such as Florida and Texas. In addition, Louisiana’s tax structure is poorly perceived because of its complexity. Therefore, in order to create a competitive advantage, the Louisiana tax system must be reformed. Several of the states that rank highest in the 2013 State Business Tax Climate Index do not levy a tax on corporations. Furthermore, the average annual growth rates for those states without a corporate income tax exceeded the growth rate of all other states...
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...Corporate taxation in Kenya Income Tax, or the tax on income, is charged on income of a person (individual & or Companies) for each year in accordance with section 3(1) of the Income Tax Act. S 3(1)’’..... a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.’’ It is important to understand the words and phrases used in the taxation of income for easier interpretation. These include: Year of income. Year of Income is a period of 12 months commencing 1 January and ending on 31 December in each year. It is the same as calendar year. Income tax is charged for each year of income. The year of income should be distinguished from the accounting year. There is a date to which accounts of a business are prepared each year, and this date would indicate the accounting year end. The accounting year ending on 31 December would coincide with the year of income. Other accounting year-ends would however fall in a given year of income and the profit or loss per the accounts would be for that year of income. For example, an accounting date ended 30 May 2011 would fall to be treated as the year of Income 2011. (Taxable) income this is a gross income from various sources minus allowable deductions i.e. expenses incurred wholly and exclusively in the production of the income. (Taxable) person, A person whose income is taxed is either: a)...
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...shares but does not actively work in corporation can draw dividends only. This paper will focus on the active owners of a small business corporation. The analysis will compare the methods and the impact on owners as well as the corporation using each approach. The mix method will also be analyzed and discussed. Basic tax concepts are based on the theory of integration. BDO defines Integration in The Tax Factor, they say that” A tax system is said to be integrated if the same amount of overall tax is paid when the income is earned indirectly through a corporation or directly by an individual.” (BDO Dunwoody, 2009, p.1) According to this theory there should be no difference to the individual regardless of the method chosen. But we know that in order for there to be integration the rates have to be perfectly matched. The tax system in Canada is not perfect and there will be a savings or a cost when drawing dividends (BDO Dunwoody LLP, 2009). Provincial corporate and personal tax rates vary significantly from provinces to province. The corporate tax rates have been very active, consistently dropping in many provinces. Along with tax rates dropping, small business limits have been...
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...Homework week one Mini Case pg 45 Why is corporate finance important to all managers? Corporate finance is the field of finance dealing with financial decisions that business enterprises make and the tools and analysis used to make these decisions. Corporate finance is important to all managers because it help managers learn the necessary skills select the corporate strategies and individual projects that add value to their company. It`s also tool for managers to know how to find funding for their company and what is the best strategy they need to adopt to do so. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. The three main forms of business organization are 1- Sole proprietorships that has 3 advantages 1. It is easily and inexpensively formed 2. It is subject to few government regulations 3. The business pays no corporate income taxes. The proprietorship also has three important limitations: 1. It is difficult for a proprietorship to obtain large sums of capital 2. The proprietor has unlimited personal liability for the business’s debts 3. The life of a business organized as a proprietorship is limited to the life of the individual who created it. 2- Partnerships with the advantage of its low cost and ease of formation The disadvantages are: 1. Unlimited liability 2. Limited life of the organization 3. Difficulty of transferring...
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...Costs of Financial Distress 16.1 Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60% and a recession is 40%. It is projected that Good Time will generate a total cash flow of $250 million in a boom year and $100 million in a recession. The firm’s required debt payment at the end of the year is $150 million. The market value of Good Time’s outstanding debt is $108.93 million. Assume a one-period model, risk neutrality, and an annual discount rate of 12% for both the firm’s debt and equity. Good Time pays no taxes. a. What is the value of the firm’s equity? b. What is the promised return on Good Time’s debt? c. What is the value of the firm? d. How much would Good Time’s debt be worth if there were no bankruptcy costs? e. What payoff, after bankruptcy costs, do bondholders expect to receive in the event of a recession? f. What cost do bondholders expect Good Time to incur should bankruptcy arise at the end of the year? 16.2 Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree that the probability of a recession next year is 20% and the probability of a continuation of the current expansion is 80%. If the expansion continues, each firm will generate earnings before interest and taxes (EBIT) of $2 million...
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...Gaëtan Nicodème The Debt-Equity Tax Bias: consequences and solutions Taxation and customs union Taxation Papers are written by the staff of the European Commission's Directorate-General for Taxation and Customs Union, or by experts working in association with them. Taxation Papers are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses. The views expressed in the Taxation Papers are solely those of the authors and do not necessarily reflect the views of the European Commission. Comments and inquiries should be addressed to: TAXUD TAXATION-PAPERS@ec.europa.eu Cover photo made by Milan Pein Despite all our efforts, we have not yet succeeded in identifying the authors and rights holders for some of the images. If you believe that you may be a rights holder, we invite you to contact the Central Audiovisual Library of the European Commission. This paper is available in English only. Europe Direct is a service to help you find answers to your questions about the European Union Freephone number: 00 800 6 7 8 9 10 11 A great deal of additional information on the European Union is available on the Internet. It can be accessed through EUROPA at: http://europa.eu. For information on EU tax policy visit the European Commission's website at: http://ec.europa.eu/taxation_customs/taxation/index_en.htm Do you want to remain informed of EU tax and customs initiatives? Subscribe now...
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