Well, Mr. Bawson, I believe we may proceed with our yesterday’s conversation.
With great pleasure! Could you put me in the picture about tax accounting? Why has this type of accounting become an important specialty throughout the world?
In the first place I should remind you that almost all individuals and organizations in the United States are required to compute their tax liability, complete the necessary forms, and pay the taxes due. Many features of the American system, both in the imposition and collection of taxes, have been adopted by other countries. The specialty of tax accounting has, therefore, developed into one of the most important branches of accounting throughout the world.
Looks like that. And what does tax accounting deal with?
It’s simple. As far as tax accounting is concerned, it is the branch of accounting that involves determining the correct liability - that is, the amount owed - for taxes, and preparing the necessary tax-return forms.
I thought as much. But it’s common knowledge that income taxes are a major concern to businesses as well as individual citizens. Unfortunately, businessmen themselves often do not understand the tax laws, and they must therefore depend on the advice of tax accountants and lawyers. I suppose a tax accountant must have a thorough knowledge of the tax code of his or her country and of any divisions within it that have the power to levy, or impose, taxes.
Precisely so. I won’t deny that in the United States, the federal tax laws are extremely complex. In addition, many income tax laws in almost all the states differ from the federal regulations. Some local governments -New York City, for example - also levy income taxes that have their own unique features. It is easy to appreciate the impact of income taxes on American business when it is realized that many of the larger corporations pay over 50 percent of their net income to the federal and state governments in the form of income taxes.
Of net income? I guess its income remaining after all legal deductions have been subtracted. And gross income is the sum before deductions. Is it correct?
Yes, it’s absolutely true. No doubt you understand that careful planning designed to decrease the tax liability to the lowest level is thus a major concern of business. This planning is made possible by various provisions in the tax laws that offer alternative methods for handling particular transactions or accounting procedures. One alternative may thus have a significant tax advantage over another, resulting in either a tax saving or a postponement of the tax liability.
Oh, I see your point. It’s clear from the above that a business can pay substantially more taxes than necessary if the wrong financial decision is made. Can you give any example of such decisions?
That’s just what I was going to say. You know among these potentially significant decisions might be included the form of business under which to organize, whether or not to set up multiple corporations, and which accounting methods should be used to deal with inventory and depreciation. You may be interested to know that inventory is the sum of tangible property held for sale, in production, or held for use in the production of goods or services to be sold. Mind, please, that the term inventory is also used for the process of determining the number of the various items on hand in the inventory.
That’s clear enough. Moreover, I know that for tax as well as accounting purposes, there are three major forms of business organization: the individual proprietorship, the partnership, and the corporation.
Right you are. And remember that tax laws vary considerably for each of these; the major difference, however, is between the corporate form and the other two. There are also nontax features that must be evaluated in choosing a form of organization.
Sorryto butt in,butwhat do you mean by nontax features?
O.K. Let’s move on to particulars. Nontax features are legal considerations, other than rates of taxation, to which a business is subject. Among these are limited liability, continuity of existence, and the ease of raising capital. The owners usually are not liable, or personally responsible, for the actions of a corporation, since the corporation enjoys legal status as an individual entity. The corporate structure also permits the company to continue to exist regardless of changes of ownership and management. Corporations can also raise capital by selling shares, known as stock, in the ownership of the company.
Isee. And what can you say about taxation in the case of both the individual proprietorship and partnership forms of business?
The thing is that income is taxed to the individual proprietors or partners. The owners of these businesses therefore pay the progressive income tax rate for individuals on their business income. A progressive income tax is one that charges a higher rate for higher earnings. An individual who earns $25,000 a year pays a higher percentage of his income in taxes than one who earns only $10,000.
That’s fair enough. And I’ve heard that corporations, on the other hand, are subject to a tax on their profits, while the stockholders of a corporation are also taxed at the individual rates on the dividends they receive from these profits. We can define dividends as sums of money paid to the owners - people who own stock in the company - out of the corporation's earnings. It’s clear, but would you clarify the concept of double taxation?
With pleasure! Firstly I’d like to remind you what a deduction is. As you are no doubt aware it’s an expense that can be subtracted, or deducted, from income prior to paying taxes. Tax deductions are used in the United States and many other countries as incentives for certain kinds of economic behavior. Interest payments on mortgages, for example, are common deductions that encourage home-owning and construction. You should know that the corporation is not allowed a deduction for the dividends it pays out when its taxable income is computed. This results in double taxation of the corporation’s income. In certain cases, the double tax is eliminated or reduced under special provisions of the tax laws.
I’d like to interrupt you here because I’ve already read about such provisions. As far as I remember under one provision, the taxpayer receives a dividend exemption (income not subject to taxation) up to $100 for dividends received during the tax year. Another provision allows a corporation to be taxed as a partnership if it meets the following requirements for a small business:
1. It is a domestic, rather than a foreign, corporation.
2. It has no more than fifteen stockholders.
3. All the stockholders are different people.
4. No stockholder is a nonresident alien.
5. There is only one class of stock.
I must say that you are knowledgeable enough in this sphere. I would only add that while the small-business corporation can save a great deal in taxes by being taxed as a partnership, it keeps the other nontax advantages, such as limited liability. You see because a corporation has status as a legal entity, liability is usually limited to the corporation itself and does not apply to the owners of the capital stock. But, unfortunately, I must leave you. Let’s discuss other income-tax advantages next time.
Agreed. I’m very obliged to you for your information.
I’m always at your service. To finalize the matter I’d like to add that the basic accounting procedure for computing income taxes is relatively simple. The final or estimated tax liability is charged to the income-taxes expense account and is deducted on the income statement. The liability is credited to the estimated-income-taxes payable account and is then classified as a current liability on the statement of financial position. There are, however, accounting problems that arise in regard to income taxes. These problems result from differences in the amount of taxable income and the amount of income reported on the income statement. This may result from the use of different accounting methods for tax purposes.
Task 1. Report the dialogue. Use the following reporting verbs:
· to remind
· to stress
· to deny
· to interrupt
· to add
· to remark
· to guess
· to agree
Task 2. Indicate whether each of the following statements is true (T) or false (F):
1. Only individual citizens, not businesses, pay income taxes in the United States.
2. Many larger corporations in the United States pay more than 50 percent of their net income to federal and state governments in the form of income taxes.
3. No form of organization or method of handling transactions can give a tax advantage.
4. A corporation enjoys certain nontax advantages over individual proprietorships or partnerships, such as limited liability, continuity of existence, and ease of raising capital.
5. The owners of individual proprietorships and partnerships show the income from their businesses on their individual tax returns.
6. In a progressive income tax, all earnings are taxed at the same percentage rate.
7. Corporations may claim a tax deduction for the dividends they pay out to stockholders.
8. There is no tax advantage available to a small-business type of corporation.
Task 3. Say it in English:
· бухгалтерский учет налогов
· подсчитывать чью-либо задолженность по налоговым платежам
· обложение налогами и взимание налогов
· бланк налоговой декларации
· облагать налогом, взимать налог
· вычитать все положенные по закону удержания
· валовая прибыль
· положения (оговорки) в налоговом законодательстве
· предлагать альтернативные методы осуществления контроля над специфическими сделками или учетными процедурами
· иметь результатом либо сумму, сэкономленную за счет уменьшения налоговых платежей, либо отсрочку задолженности по налоговым платежам
· оценивать необлагаемые налогом особенности компании
· непрерывность существования и легкость получения капитала
· получать капитал от продажи акций
· платить ставку прогрессивного подоходного налога для физичес-ких лиц с их дохода от предпринимательской деятельности
· уплата процентов по закладной (на недвижимое имущество)
· устранять или уменьшать двойной налог
· получать освобождение от выплаты дивидендов
· корпорация имеет статус юридического лица
· относить окончательную или оцененную задолженность по налоговым платежам на счет расходов по подоходным налогам и вычитать в отчете о прибылях и убытках
· кредитовать задолженность по счету оцененной задолженности по налогу на прибыль
Task 4. Use Supporting Materials to continue the dialogue about tax accounting. Make use of helpful phrases from the dialogue above.
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