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Taxation of Corporate
Income
Copyright 2002 Thomson Learning, Inc.
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Printed in the United States of America
ISBN 0-03-033652-X
Copyright 2002 by Thomson Learning, Inc.
Forms of Business
Sole Proprietorships
Partnerships
Corporations
Corporations
Corporations are granted the legal
status of people.
This means that they can own property
and borrow money.
Corporate Ownership
Corporations are owned by shareholders. Each
share entitles its holder to a fraction of the
dividends declared;
of the vote at shareholders meetings that determine
the operations of the corporation;
proceeds if the corporation were to dissolve.
Corporate Taxes
Corporations are subject to a corporate
income tax in the U.S.
Since the corporation is not really a person,
the people who bear the burden of this tax
depend on the shifting of the tax.
The tax could be shifted backwards to
employees, shifted forward to consumers or
borne by the shareholders.
Taxation of Owner-Supplied
Inputs
In a small business setting, the owner works
for him or herself. The profit from the
business is what this owner is paid.
Some of this is normal profit, some economic
profit.
When there is a corporation there is no
owner-supplied input so all profit, normal and
economic, is taxed.
Economic Depreciation
Economic Depreciation is the amount that an
asset devalues over time.
When a business buys an expensive capital
asset, it cannot deduct from corporate profits
the entirety of the value of the asset.
Because the asset will be productive for a
substantial period of time, companies can only
deduct a portion of the value of the asset.
Accelerated Depreciation
Accelerated depreciation allows businesses to
deduct the loss in the value of an asset before
it occurs.
The ultimate in accelerated depreciation is the
allowance for expensing an asset in the year it
is purchased.
Typically assets are allowed to be depreciated
on a straight-line basis, which means in equal
increments for the life of an asset.
Item
50% Debt
50% Equity
Balance Sheet
Total Assets
All-Equity
$1,000,000
$1,000,000
$500,000
$1,000,000
$500,000
$150,000
$150,000
$50,000
$150,000
$100,000
Income Tax
$51,000
$34,000
Income after
Corporate Tax
$99,000
$66,000
9.9%
13.2%
Debt
Shareholders Equity
Income Statement
Operating Income
Interest Expense
Taxable Income
Return on Equity
Rate Structure
Average Tax
Rate at the
Beginning
of the
Bracket
Marginal
Tax Rate
0%
15%
$50K <
income<$75K
15%
25%
$75K<income<$10
Mill
18%
34%
34%
34%
Taxable Income
MC
AC*
After-Tax Profits
E
B
0
Copyright 2002 by Thomson Learning, Inc.
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