Solutions Manual For South-Western Federal
Taxation 2024 Essentials Of Taxation Individuals
And Business Entities 26th Edition By Nellen,
, CHAPTER 1
INTRODUCTION TO TAXATION
SOLUTIONS TO PROBLEM MATERIALS
PROBLEMS
1. (LO 1) Various Answers Are Possible, Including Using The Key Terms At The End Of Each Chapter,
Referring To The Glossary (Appendix C), Looking Up The Footnote Resources To The Internal
Revenue Code In Appendix D, Using Chapter Features (E.G., Global Tax Issues, Ethics & Equity,
Tax Planning, And Digging Deeper), Examining The Tax Forms Used In The Chapters, And
Completing Additional End- Of-Chapter Assignments. All Of These Resources Will Help Students
Engage More Deeply With TheMaterials And Help Their Understanding.
2. (LO 3, 5, 6) Some Tax And Nontax Considerations James Should Investigate Include The Following:
State And Local Income Taxes.
State And Local Sales Taxes.
State And Local Property Taxes.
Employee Implications Of The Move (Will James Lose Current Employees? Is The Labor
MarketBetter In The New Location? Is Cost Of Living Lower Or Higher In New Location?).
Logistics/Transportation Of Products To Customers (Specifically Document Lower Costs).
State Infrastructure (Better In New Location?).
3. (LO 1, 2, 3) A Tax Is Regressive If It Represents A Larger Percentage Of The Income Of A Low-
Income Taxpayer Relative To The Income Of A High-Income Taxpayer. Examples Of Regressive
Taxes Include Sales And Excise Taxes. A Tax Is Progressive If It Represents A Larger Percentage Of
The Income Of A High- Income Taxpayer Relative To The Income Of A Low-Income Taxpayer. The
Federal Income Tax Is An Example Of A Progressive Tax.
4. (LO 3)
a. The Parsonage Probably Was Not Listed On The Property Tax Rolls Because It Was Owned
By A Tax-Exempt Church. Apparently, The Taxing Authorities Are Not Aware That
Ownership Has Changed.
b. Ethan Should Notify The Authorities Of His Purchase. This Will Force Him To Pay Back
Taxes ButMay Eliminate Future Interest And Penalties.
5. (LO 1, 6) (See Digging Deeper 1.) As To Adam Smith’s Canon On Economy, The Federal Income
Tax Yields A Mixed Result. From The Standpoint Of The IRS, Economy Exists As Collection Costs
Are Nominal (When Compared With Revenue Generated). The Government's Cost Of Collecting
Federal Taxes Amounts To Less Than One-Half Of 1 Percent Of The Revenue Collected. Economy Is
Not Present, However, If One Looks To The Compliance Effort And Costs Expended By Taxpayers.
According To Recent Estimates, About 56% Of Individual Taxpayers Who File A Return Pay A
Preparer, And One-Third Purchase Tax Software.
1-1
,1-2 2023 Essentials Of Taxation/Solutions Manual
6. (LO 3) Jang Probably Will Be Required To Pay The Washington Use Tax If, And When, He Applies
For Washington License Plates. In This Case, The Use Tax Probably Is The Same Amount As The
Washington Sales Tax. See The Discussion In Connection With Example 14 In The Textbook.
7. (LO 3) Although The Baker Motors Bid Is The Lowest, From A Long-Term Financial Standpoint, It
Is The Best. The Proposed Use Of The Property By The State And The Church Probably Will Make It
Exempt From The School District’s Ad Valorem Tax. This Would Hardly Be The Case With A Car
Dealership. In Fact, Commercial Properties (E.G., Car Dealerships) Often Are Subject To Higher Tax
Rates.
8. ((LO 3, 4) A Possible Explanation Is That Sophia Made Capital Improvements (E.G., Added A
Swimming Pool) To Her Residence And Her Parents Became Retirees (E.G., Reached Age 65).
9. (LO 5, 6) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
February 25, 2022
Cynthia Clay
1206 Seventh Avenue
Fort Worth, TX 76101
Dear Cynthia:
I Am Writing This Letter To Help You Decide On What Form Of Entity To Choose For Your New
Food Delivery Business. In Our Phone Conversation, You Indicated That You Expect To Have Losses
For The First Two Years In This Business And Then Make Substantial Profits In Subsequent Years.
You And Marco Also Indicated That You Are Concerned About Potential Personal Liability.
While I Can’t Make A Conclusive Recommendation Based On The Information You Have Given Me,
I Can Provide You With Some General Guidelines That Should Simplify Your Decision. First, Given
Your Concern About Personal Liability, A Partnership Does Not Appear To Be A Desirable Option
(You Would Both Be Personally Liable For Any Injuries To Customers). Similarly, Given Your
Expectation Of Losses In The First Two Years, It Does Not Appear That A C Corporation Would Be
A Desirable Choice, At Least Initially. This Is Because Any Losses In The Corporation Could Only
Be Used To Offset Future Corporate Profits—You Could Not Use The Losses To Immediately Offset
Your Personal Tax Liability.
Thus, Two Choices Exist Which Provide Limited Liability And Deductibility Of Losses On Your
Personal Income Tax Return. These Are The S Corporation And The Limited Liability Company.
If You Choose An S Corporation, We Would Probably Convert The Entity To A C Corporation
When The Business Becomes Profitable. At That Point, Profits Would Be Taxed At The C
Corporation Rate. A Second Tax Would Be Levied On Your Personal Income Tax Return For Any
Dividends Paid By The Corporation Once It Achieves C Status. In Contrast, Limited Liability
Companies Are Taxed Like Partnerships—All Income Would Be Taxed On Your Personal Income Tax
Return In Profitable Years. The Relative Desirability Of Each Of These Two Forms Depends On A
Number Of Factors. One Of The Most Important Factors In Your Situation Is The Relationship
Between Your Personal Tax Rate And The Tax Rate Of A C Corporation. If You Are In A High Tax
Bracket And If The Income In The Business Is Sufficiently Low, You Might Be Best Off Choosing
The S Corporation. Alternatively, If You Expect The Business To Generate A Sufficiently Large Profit
Each Year, It Might Be Best To Choose The Limited Liability Company. The Qualified Business
Income Deduction For Income From Flow- Through Entities Along With The Flat Tax Rate Of 21%
That Applies To Corporations Also Must Be Taken IntoConsideration.
© 2023 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
mynursytest.store
, ACCESS Test Bank For South Western Federal Taxation 2023 Essentials Of
Taxation Individuals And Business Entities 26th Edition Nellen
Introduction To Taxation 1-3
If You Would Like Me To Give You A Clearer Recommendation, We Should Meet At Your Earliest
Convenience. If You Have Any Additional Questions, Please Call Me.
Best Regards,
Julian Jackson, CPA
10. (LO 5, 6)
A. Year 1 Year 2 Year 3
Corporate Tax Liability
Sales Revenue $150,000 $320,000 $600,000
Cash Expenses (30,000) (58,000) (95,000)
Depreciation (25,000) (20,000) (40,000)
Taxable Income $ 95,000 $242,000 $465,000
Corporate Tax Liability $ 19,950 $ 50,820 $ 97,650
Cash Available For Dividends
Sales Revenue $150,000 $320,000 $600,000
Tax-Free Interest Income 5,000 8,000 15,000
Cash Expenses (30,000) (58,000) (95,000)
Corporate Tax Liability (19,950) (50,820) (97,650)
Cash Available For Dividends $105,050 $219,180 $422,350
Ashley’s After-Tax Cash Flow
Dividend Received $105,050 $219,180 $422,350
Tax On Dividend At 15% Rounded (15,758) (32,877) (63,353)
After-Tax Cash Flow $ 89,292 $186,303 $358,997
PV Of Cash Flow* $ 79,729 $148,521 $255,534
Total Present Value $483,784
*Present Value Factors (.8929, .7972, .7118) From Appendix E.
B. Year 1 Year 2 Year 3
Individual Tax Liability
Sales Revenue $150,000 $320,000 $600,000
Cash Expenses (30,000) (58,000) (95,000)
Depreciation (25,000) (20,000) (40,000)
Taxable Income $ 95,000 $242,000 $465,000
Individual Tax Liability** $ 23,750 $ 60,500 $116,250
**Rate = 25%
Ashley’s After-Tax Cash Flow
Sales Revenue $150,000 $320,000 $600,000
Tax-Free Interest Income 5,000 8,000 15,000
Cash Expenses (30,000) (58,000) (95,000)
Individual Tax Liability (23,750) (60,500) (116,250)
After-Tax Cash Flow $101,250 $209,500 $403,750
PV Of Cash Flow* $ 90,406 $167,013 $287,389
Total Present Value $544,808
*Present Value Factors (.8929, .7972, .7118) From Appendix
E.
