Accounting 4310                                     Roger W. Clark , Instructor

Income Tax Accounting                           Office: KB 143

Fall Semester, 1998                            Office Hrs: 10-11 a.m. MWF

MWF 11:00 - 11:50 KB 114              and by appointment

Phone: 648-7574

Text: West's Federal Taxation, Comprehensive volume (1998 edition), Hoffman. Turbotax software.

Prerequisites: Accounting 2020

Objectives: The concepts and methods of determining federal income tax liability for the individual will be presented with explanations of historical background, purposes, and results of tax statutes and regulations. Topics include the elements of taxable income, deductions and tax computations.

Specific Objectives: At the end of this course the student will be able to: 1. Describe Adam Smith's characteristics of a good tax and critique the current federal income tax system in terms of these characteristics. 2. State the basic formula for the calculation of an income tax liability, and define each element in the formula. 2. a. Understand how this formula differs for each of the taxable entities and conduit entities in the federal income tax system. 3. Recognize common differences between the calculation of taxable income and book income under generally accepted accounting principles (GAAP). 4. Explain the difference in the tax consequences of taxable and nontaxable exchanges, and describe the commonalities of nontaxable exchanges and other tax deferred transactions. 5. Contrast the tax implications of an 'arm's length transaction' and a 'related party transaction.' 6. Define the term 'tax planning' and list the fundamental concepts upon which tax planning techniques are based.

Class Participation: Attendance and class participation is expected. Students will be graded based on class participation and attendance.

Grading:

A = 90% or more                             Two  exams @ 100        200

B = 80% to 89%                              Final exam                      100

C = 70% to 79%                             Comprehensive Problem 100

D = 60% to 69%                             Class Participation            15

F = below 60%                                Total                              415

Three exams will be given besides the final and the lowest grade dropped. No makeup exams will be given. In the business world "C" or average work is not acceptable to most employers. This work is usually given back to the employee to do over. In keeping with this any student that makes a "C" or lower on a test or assignment will have the opportunity to do the assignment over. The highest grade possible on a second try will be 85.

Comprehensive problem:  The comprehensive problem will be done in teams.  This will call for research in the library, on the Internet and using our computerized tax library.  To do a good job every member must attend group meetings and do the tasks given them.  In keeping with this 30% of your project grade will be decided by the vote of your group members.

Class Presentation: A group presentation of various tax structures will be made to the class around the first part of the semester.

Course content:

Aug. 19, W.  1 Introduction Adam Smith's characteristics of a good tax system and how they relate to the current tax structure, the flat tax the proposed national sales tax and comparisons of various tax proposals . Students will research these topics on the Internet as well as reading in the book. Students will be divided into groups and report on one of these tax issues in the third class session A test question will be given on application of these principles to a given tax structure.

Aug 21, F Chapter 2. The Tax formula. What is Income? This chapter frequently intimidates many students, as it summarizes 90% of the contents of the course. I am not interested in your memorizing the various items contained in each element of the tax formula in this chapter. They will be studied in detail for the rest of the course. I am more interested in the following:

(1) The formula itself on page 2-2 (2) Itemized and standardized deductions. Why are they in the code. (3) Personal and dependency exemptions. (4) Filing status.

Aug 24, M.  Chapter 3 What is income? Remember, income is gain, from any source derived. This chapter emphasizes accounting income and the differences between accounting and taxable income. Remember, the objective of the Internal Revenue Code is to raise revenue while the objective of the accountant is to present the status of a company at any particular time. These two objectives sometimes conflict. This forces the taxpayer to many times keep two sets of books. They should always reconcile to each other. this is done on schedule M of the companies tax return. 1. Accounting vs. economic income a. The realization concept. 2. Year of inclusion a. Methods of accounting (These are Cash, Accrual and Hybrid) (1) Exceptions applicable to cash and accrual base taxpayers. 3. Items in Gross income. The fruit and the tree. 4. Alimony and child support 5. Imputed interest. 6. Related party transactions. "Gosh, my ten year old daughter sure skinned me in that deal!"

Aug 26, W. Chapter 3 What is Income?

Aug 28, F. The Tax formula.

Aug. 31, M.  Holiday..

Sept. 2, W. Varations for corporations, partnerships, subchapter S corporations. Chapter 16, pp. 16-2, 16-7, 16-9-11.

Sept. 4, F Reports - Types of tax structures and Adam Smith's criteria.

Sept 7, M. Chapter 4. Exclusions. Not much time will be spent on this chapter. The main thing to remember is that these are specific exemptions from income that are mandated by Congress. Because they are specific exemptions they are construed very narrowly. The specifics often change, thus forcing you to consult your manuals frequently in your career. I am more interested in the reasoning behind these exclusions. Topics covered are:

    1. Gifts and inheritances. a. Life insurance proceeds.

    2. Compensation for injuries and sickness.       

    3. Employee benefits.

    4. Income from discharge of indebtedness.

Sept 9, W. Chapter 4. Exclusions.

Sept 11, F.  Discussion of the tax case.

Sept 14, M. Test.

Sept 16, W. Chapters 5 & 6. Deductions and losses 1. Deductions for and from income. What is the difference? Which is more valuable? 2. Business vs personal losses. a. Ordinary and necessary. b. Timing and accounting methods. c. Illegal businesses and public policy. d. Businesses vs hobbies. e. Rental of vacation homes? f. Related party transactions. 3. Net operating losses 4. Bad debits and casualty losses.

Sept 18, F. Chapters 5 & 6. Deductions and losses

Sept 21, M. Chapters 5 & 6. Deductions and losses

Sept 23, W. Chapters 5 & 6. Deductions and losses

Sept 25, F.  Discussion of Tax case.

Sept 28, M Chapter 7. Depreciation, amortization and depletion. Here you will find enough tables and computations to satisfy the most avid number cruncher. Congress seems to enjoy nothing more than changing the amounts taken for cost recovery. I therefore am not interested in your learning about using these tables so much as the concepts behind them. (Any good computerized tax program will compute this for you, anyway). 1. Depreciation and cost recovery. What are the similarities and differences? ACRS and MACRS. 2. The conventions- Mid quarter, mid year, mid month 3. The section 179 expense election. When can it be used? What are the limits? 4. Amortization and depletion.

Sept 30, W. Chapter 10. Passive activity losses.

    1. The tax shelter problem and the at-risk rules. What was this problem? What conflicting interests and basic philosophies of government went into the making of these laws?

    2. The Passive loss rules. Taxpayers that have passive losses cannot take them against active or portfolio income. Why is this the case?

A. The exceptions 1. Closely held corporations. 2. Regular C type corporations 3. Personal service corporations.

B. What is a passive activity?

    1. Sec 469 A. Rent

    2. Material participation.

         A. The seven tests. Why do we have these?

         B. Changing tax outcomes with significant participation.

        C. Rental activities.

                  1. The exceptions. P 10-13 and 10-14

                  2. Grouping rental activities

                  3. Exceptions

                       A. Low income housing

                       B. Real estate professionals

                      C. The $25,000 exception.

                      D. Disposition of passive activities.

                      E. The fun part: PILS, PIGS, and PALS

Oct 2, F. Chapter 10. Passive activity losses.

Oct 5, M. Chapter 12. Property transactions.1. Gain and loss: Realized and Recognized. They are not the same. Getting the difference down early will save you a lot of grief later. A. Recovery of capital 1. Allocation of capital among items (a) Goodwill. B. Gifts. C. Property acquired from a decedent. D. Related parties and disallowed losses. Same story, same ending. E. Wash sales. The 30 day rule. Avoiding this using the patented "almost but not quite doctrine". 2. Nontaxable exchanges. But why? A. The like-kind exchanges. Students tend to remember this more than any part of this chapter (as much as they try to forget). 1. Like-kind property. (A) related parties (B) general business asset classes. (C)boot. B. Involuntary conversions. 1. Taxpayer use and functional use tests. C. Sale of a residence. 1. Replacement period. 3. Summing it all up - Tax planning considerations.

Also in this chapter is sale of personal residence and the over 55 exclusion.

Oct 7, W. Chapter 12. Property transactions.

Oct 9, F. Chapter 12. Property transactions.

Oct 12, M.  Fall Break.

Oct 14, W.  Chapter 12. Property transactions.

Oct 16,  F. Chapter 12. Property transactions.

Oct 19, M. Test two.

Oct 21, W. Chapter 13. Capital Gains and Losses This section can cause no end of headaches. It is, however, vital to your knowledge of the tax code. These classifications in the code were originally too give a tax break to persons holding property for long periods of time. Congress also felt that persons using the property for productive purposes should have an additional tax break. Why was this the case? Answering this question will help you a great deal in deciding which asset goes where. A. Capital assets 1. What is a capital asset? Better you should ask what is not a capital asset. A. Gain on sale or exchange. What if it just becomes worthless? B. The holding period rules. C. Corporate vs non corporate taxpayers. The tax treatment of capital gains and losses. B. Section 1231 Assets. This section grew from the idea that Congress should give an extra tax break to taxpayers that actually used their assets in business. C. Section 1245 recapture. D. Section 1250 recapture. E. Tax planning.

Oct 23, F. Chapter 13. Capital Gains and Losses

Oct 26, M. Chapter 13. Capital Gains and Losses

Oct 28, W. Discussion of the tax case.

Oct 30, F. Chapter 14. The AMT. This is a "backup" tax that is designed to ensure that all taxpayers with sufficient economic income will pay some minimum amount of tax. The formula is fairly simple. It takes AGI and factors in tax preferences to arrive at the alternative taxable amount. Sometimes common sense helps here when all else fails.

Nov 2, M.  Chapter 14. The AMT.

Nov 4, W. Chapter 8. Deductions and Losses. employee expenses and itemized deductions. What is an employee? We are now into the "cocktail party" chapters. By this I mean that if you do not know much of the contents of these chapters it might cause you some embarrassment at cocktail parties, but you at least will not get sued for all you have (which is a definite possibility if you mess up in the areas above). We will give attention to these as time permits.

Nov 6, F.  Chapter 8. Deductions and Losses Among these are the Home Office Deduction. Usually this deduction is a bad idea.

Nov 9, M. Chapter 9. Tax credits.

Nov 11, W. Chapter 9. Tax credits

Nov 13, F. Chapter 15. Accounting Periods and Methods. When a partnership or S type of corporation has a year ending at a time other than the owner's year there is a chance of income deferral. For this reason the IRS attempts to keep these year ends the same. Items of note here are concepts of majority interest partners, principal partners and least aggregate deferral methods. Partnerships, s corporations and PSC's can elect impermissible years under certain conditions. There are three accounting methods that are permissible. A review of chapter three will be helpful here. Knowing the all events test and the economic performance test is necessary. We will also cover the installment method, long term contracts and accounting for them.

Nov 16, M. Chapter 15. Accounting Periods and Methods.

Nov 18, W. Chapter 18. Corporate Dividends. What is a taxable dividend and what is a non taxable distribution? Know the differences between accounting retained earnings and E&P. Property dividends. Know the effect on the corporation and the shareholder. Constructive dividends. These are the "hidden dividends". They most frequently occur in small, closely held corporations. Why are they important? Why is the IRS so upset about them? Stock dividends and rights. Stock redemptions. This is a valuable tool in tax planning. Know the rules and problems with distributions essentially equivalent to a dividend, stock attribution rules, etc.

Nov 20, F. Chapter 18. Corporate Dividends.

Nov 23, M. Chapter 18. Corporate Dividends.

Nov 25, W. Chapter 18. Corporate Dividends.

Nov 27, F.

Nov 30, M. Test Three.

Dec 2,, W. Review.

Dec 4, F. Last day of classes.

Dec 8, Tue 1:30-3:30 . Final Exam

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