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Introduction to Taxation
Chapter 1
Taxation (34221) Prepared by: Radhi Hamadeen Dept. of Accounting , PSUT 2015
Outline
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Tax Definition
Why to impose Taxes?
The Structure of Taxes (Tax Terminology)
Types of Taxes
Income Taxation of Business Entities
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Key Objectives
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Define Tax,
Distinguish different types of Taxes,
Understand the concept of Income Tax,
Distinguish different types of business entities
and how they should be treated for taxation
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Definition of Tax
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Tax originally from the Latin taxo: I estimate
Taxing is to impose a financial charge or other levy
upon a taxpayer (an individual or legal entity) by a
state or the functional equivalent of a state such that
failure to pay is punishable by law.
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Tax Definition Cont.
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Why to Impose Taxes?
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Money provided by taxation has been used by states to
carry out many functions, these include:
the enforcement of law and public order,
protection of property,
economic infrastructure (roads, legal tender, enforcement of contracts, etc.),
public works, social engineering,
the operation of government itself,
fund welfare and public services.
pay off the state's debt and the interest this debt accumulates,
fund education systems, health care systems, pensions, unemployment
benefits, and public transportation, and
Energy, water and waste management systems are also common public
utilities.
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The Structure of Taxes (Tax Terminology)
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Taxes have two components: tax rate and tax base
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The Structure of Taxes (Tax Terminology)
Cont
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Types of Taxes
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Income Tax
Taxes on the Production and Sale of Goods,
this includes for example:
- excise tax levied on specified commodities
e.g. oil, tobacco, phone services;
- sales and use tax major source of income
for a state; items subject to tax are varied
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Types of Taxes Contd.
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- Value Added Tax (VAT) - a sales tax levied on
the value added at each stage of production
Employment Taxes - these taxes include
- FICA taxes (Federal Insurance Contributions Act)
social security and medicare;
- FUTA (Federal Unemployment Tax Act) a
regressive tax being paid by employer (e.g. 6.2% of
the first $7000 of wages US)
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Types of Taxes Contd.
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Death Taxes
Gift Taxes
Property Taxes
Taxes on Privileges and Rights (custom
duties; franchise and occupational; severance
extraction of natural resources)
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Income Taxation of Business Entities
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Proprietorships:
- Simple form of business is not a separate entity
from the individual owner;
- Profits are reported on the taxpayers personal return.
Corporations:
- separate legal entities. Most corporations are
separate taxable entities, called C corporations or
regular corporations.
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Income Taxation of Business Entities Contd
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Partnerships:
- While required to file a return, a partnership is not
a separate taxable entity and is not subject to
taxation.
- The financial results of the partnership
flow-through to the partners and are reported on
their tax returns.
Limited Liability Companies & Partnerships
These entities follow the same tax rules as partnership
End of Chapter 1 14