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Lecture 4

ACCT40610 Lecture Notes - Lecture 4: Tax Evasion, Deferred Income, Progressive Tax


Department
Accountancy
Course Code
ACCT40610
Professor
O' Brien
Lecture
4

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Chapter 4
Tax avoidance consists of legitimate means of reducing taxes.
Tax evasion consists of illegal means of reducing taxes.
o Felony offense punishable by severe monetary fines and
imprisonment.
Tax consequences of a transaction depend on the interaction of four
variables.
o Entity variable: Which entity undertakes the transaction?
o Time period variable: In which tax year does the transaction occur?
o Jurisdiction variable: In which taxing jurisdiction does
the transaction occur?
o Character variable: What is the tax character of the income, gain, loss,
or deduction from the transaction?
Generally, taxable income is computed under the same rules across business
entities.
o However, the tax on business income depends on the difference in tax
rates across entities.
o The two taxpaying business entities are individuals
and corporations.
Individual taxpayers.
o Progressive tax rate structure ranging from 10% to 39.6%.
Corporate taxpayers
o Progressive tax rate structure ranging from 15% to 39%.
Tax costs decrease (and cash flows increase) when income is generated by an
entity subject to a low tax rate.
When establishing a new business, consider the tax rates paid by type of
business entity.
Income shifting.
o Arranging transactions to transfer income from a high tax rate entity
to a low tax rate entity.
Deduction shifting.
o Arranging transactions to transfer deductions from a low tax rate
entity to a high tax rate entity.
After an income or deduction shift, the parties in the aggregate are financially
better off by the tax savings from the transaction.
Assignment of income doctrine.
o Constraint on income shifting.
o Income must be taxed to the entity that earns it from
sale of goods or performance of services.
o Income generated by capital must be taxed to the entity that owns the
capital.
In present value terms, tax costs decrease (and cash flows increase) when a
tax cost is deferred until a later taxable year.
Constrained by:
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