MGMT 127A Lecture Notes - Lecture 3: Internal Revenue Code, Sole Proprietorship, Sixteenth Amendment To The United States Constitution

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8 May 2016

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1. Lecture 3: continuation of section 1
History of tax:
oThe revenue act of 1913- ratification of the 16th amendment to the US constitution
sanctioned both federal individual and corporate taxes
Before this act, the constitution didn’t say that we were allowed to tax
o16th amendment: "the congress shall have power to lay and collect taxes on incomes,
from whatever source derived, without apportionment among the several states, and
without regard to any census or enumeration"
o1913-1939: various revenue acts were passed
1943: Current tax payment act: provided for a "pay as you go" tax system which requires
employers to withhold for taxes a specified portion of an employee's wages
o1939: Revenue laws were codified: "internal revenue code of 1939"
o1954: similar codification took place (revamped the code!)
o1986: internal revenue code of 1986- carries over the provision of the '54 code
This is the most recent revamp
We still use this version today which might be a sign that we are due for another
revamp soon
We currently have one of the highest corporate taxes in the world which is not
Recent changes (these are only the ones since 2001, not even since 1986: there are so many
that it shows that it really is time to re-do it)
oThe tax relief reconciliation act of 2001
oJob creation and worker assistance act of 2002
oJobs and growth tax relief reconciliation act of 2003
oAmerican jobs creation act of 2004
oEnergy incentives act of 2005
oTransportation equity act of 2005
oTax increase prevention and reconciliation act of 2005 (passed into law in 2006)
oPension protection act of 2006
oSmall business and work opportunity tax act of 2007
oThe economic stimulus act of 2008
oAmerican recovery and reinvestment act of 2009
oWorker, homeownership, and business assistance act of 2009
oAffordable care act of 2010
oTax relief, unemployment insurance reauthorization and job creation act of 2010
oTemporary payroll tax cut continuation act of 2011
oMiddle class tax relief and job creation act of 2012
oAmerican taxpayer relief act of 2012 (passed into law 1/1/13)
oTax increase prevention act of 2014 (passed 12/19/14)
Tax forms: MUST KNOW
***in the assignments, if a page in the tax return says "keep for your records" then you probably
should not turn it in***
Main summary form is the 1040, everything else goes on subsequent schedules and forms
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o1040: individual tax form- summary form that includes totals from all other forms and
1040 is the basic summary form- it begins with gross income from the tax
equation (later in these notes)
Note that municipal bonds (which are an exclusion and not included in gross
income) are looked at separate and still included on the 1040
The total on schedule A comes over to 1040 page two
Income shows up on line 7
Fed income tax shows up on line 64
Line 8a and 8b (taxable interest) come from schedule B
Line 12 (business income/loss) comes from schedule C (for sole proprietorships)
Line 13 (capital gain/loss) comes from schedule D
Schedule C already has net business expenses in it, so the deductions for that
are not listed under the for AGI deductions (in the section labeled AGI)
But since these expenses are taken out of income before we find AGI, they can
still be included in the for AGI deductions list (same with rental expenses)
o1040 EZ: individual tax form- used by a tax payer who does not itemize his deductions
oSchedule A: itemized deductions
Line 2 on schedule A shows the AGI (from the 1040)
Then line 3 has you multiply AGI by 10% (the floor)
oSchedule B: interest and dividend incomes
oSchedule C: Business income and expenses
Basically everything related to business (revenue and expenses!)
P&L statement for the business (profit and losses)
For a sole proprietorship it goes on the schedule C of the 1040
oSchedule E: Supplemental incomes and losses- rents royalties and k-1 income from S
corps and partnerships
Partnerships (includes LLCs, LLPs, limited partnerships, and general
partnerships), s corps, and trusts
oSchedule SE: self employment tax
Half is deductible for AGI which therefore shows up on 1040 pg 1 (where all for
AGI deductions show up)
oForm 4562: depreciation
Depreciable assets cannot include personal home assets
If you use the house as a rental property (counts as an investment asset) then it
can be depreciated
Other assets that can be depreciated include an office building, a taxi (has to be
only used for work), a car that you use for uber (can only depreciate to the extent that
you use if for the job though- so you can only depreciate the portion of your car that it
contributable to the miles you drive specifically for uber)
If you work out of your home (home office) it has to be a portion of your home
that is solely used for business purposes
Depreciation has its own form for each business or investment that is
Each 4562 is linked to a schedule C or a schedule E: link to C for your business
things, link to E for rental things
oForm 4797: Sale of business property
oForm 6251: Alternative minimum tax
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