Assignment 3: Lasa Itax Seminary — Are The Instructor Of A C

Assignment 3 Lasa Itax Seminaryou Are The Instructor Of A One Day Ta

Explain the purpose of a background report for a one-day tax seminar aimed at international students studying business in the United States, including the key components such as programs supported by tax revenue, U.S. tax structure, sources for tax research, and an example of the cash basis for tax purposes. Provide detailed, structured content covering these areas to prepare for a comprehensive presentation.

Paper For Above instruction

The purpose of this report is to equip instructors with the necessary knowledge to effectively conduct a one-day tax seminar targeting international students studying business in the United States. The report emphasizes understanding government programs funded by taxes, the U.S. tax structure's characteristics, primary and secondary sources of tax research, and a detailed explanation of the cash basis of accounting—crucial for explaining tax principles in an educational setting.

Government Programs Supported by Tax Revenue

In the United States, tax revenue funds a diverse array of government programs essential for societal welfare and economic stability. Three key programs exemplify this support: Social Security, Medicare, and National Defense. Each program is financed through specific taxes, with distinct entities and activities targeted by these levies.

Social Security, predominantly funded through payroll taxes under the Federal Insurance Contributions Act (FICA), supports retirement, disability, and survivors' benefits. As of recent data, approximately 90% of Social Security funding is derived from payroll taxes levied on employers and employees at a rate of 12.4% on wages up to a taxable maximum (Social Security Administration, 2022). The program consumes about 20% of total federal revenue, underscoring its significance.

Medicare is financed through a dedicated payroll tax of 2.9% on wages, split equally between employers and employees. Additional income-based taxes fund Medicare Part B and Part D through premiums. Medicare supports health coverage for Americans aged 65 and older and certain disabled individuals. The program accounts for around 15% of federal revenue, demonstrating a substantial investment in public health services (Centers for Medicare & Medicaid Services, 2023).

National Defense is primarily funded through income taxes and other federal taxes, with appropriations allocated for military operations, veterans' services, and homeland security. The Department of Defense’s budget in recent years consumes about 15-20% of federal discretionary spending, illustrating the strategic priority placed on national security (U.S. Department of Defense, 2023).

The underlying principles of taxation—equity, efficiency, and simplicity—are evident in these programs. Income taxes support programs like Social Security and Medicare based on ability to pay, aligning with the principle of vertical equity, while ensuring efficient fund collection. Defense spending, funded through broad-based taxes, exemplifies the principle of efficiency and federal revenue utilization to promote national interests.

Tax Rate Structure in the U.S. Tax System

The United States employs a progressive tax rate structure, wherein tax rates increase with income levels. This structure aims to achieve fairness by imposing higher rates on higher income brackets. The federal income tax system comprises seven brackets ranging from 10% to 37% (Internal Revenue Service, 2023). Advantages of this approach include income redistribution and social equity; however, disadvantages involve increased complexity and potential disincentives to earn higher incomes.

In terms of corporate and indirect taxes, the U.S. applies a mix of flat, diminishing, or tiered rates, tailored to specific tax types and regions. For instance, sales tax rates vary by state, and corporate tax rates are subject to federal and state levies. The federal corporate tax rate is 21%, introduced by the Tax Cuts and Jobs Act of 2017, which simplified previous complex multiple rates (U.S. Congress, 2017). Advantages of such structures include ease of administration and predictability, but they can also result in tax avoidance and diminished progressivity.

Primary and Secondary Sources of Tax Research

Tax research relies on multiple authoritative sources, primarily categorized as primary and secondary sources. Primary sources are original legal documents and statutes that have binding authority. Examples include Internal Revenue Code (IRC), Treasury Regulations, and relevant court decisions. These sources provide the foundational legal framework for tax laws and are indispensable for authoritative tax research (IRS, 2023).

Secondary sources interpret, analyze, and comment on primary laws. These include tax journals, legal commentaries, textbooks, and IRS publications. Secondary sources are critical for understanding the application and interpretation of primary laws, offering practical insights and explanations. They often clarify ambiguities and provide guidance based on court rulings and administrative rulings, such as Revenue Rulings and Notices (KPMG, 2022).

The primary source’s legal authority makes it authoritative and binding, whereas secondary sources are interpretive and supportive, aiding practitioners in applying primary law accurately. Both are essential for comprehensive tax research—primary sources establish the legal rule, while secondary sources offer practical guidance and contextual understanding.

Application of the Cash Basis Method: XYZ Manufacturing, Inc.

XYZ Manufacturing, Inc., uses the calendar year and the cash method of accounting. This method recognizes income when received and expenses when paid, making it crucial to determine whether specific payments on December 31, 2010, are deductible in that year.

Analyzing each payment: The $100,000 paid for a two-year office lease starting February 1, 2011, is generally not deductible in 2010 under the cash method because the payment was made before the lease commenced, and the expense relates to a future period (IRS, 2022). Expenses are deductible only when paid, and the lease corresponds to 2011 and subsequent years, thus deductible in 2011.

The inventory items totaling $58,000 are considered expenses when paid, so they are deductible in 2010, as the cash was disbursed. Inventory costs are deductible when paid unless the company elects to capitalize inventory costs, which is uncommon for small manufacturers (IRS, 2022).

The $21,800 paid for new manufacturing equipment was delivered and set up in January 2011. Since payment was made before delivery, under the cash method, the expense is deductible in 2010 if it is an expense (like a deposit or partial payment). However, equipment purchases are generally capitalized and depreciated over time under the IRS rules, so the actual deduction is spread over the useful life starting from 2011 (IRS, 2022).

The $10,000 paid for auditing services in January 2011 is deductible in 2010 because the payment was made during the year 2010, prior to the service date, aligning with the cash method's recognition of expenses when paid.

The property tax of $30,500 paid for the first six months of 2011 is deductible in 2010 only if paid in that year and relates to the period before the company’s tax year ends; however, in this case, the payment is for the 2011 period, so it is generally deductible when paid if it is a real property tax (IRS, 2022).

Advantages of the Cash Method

The cash basis offers simplicity and ease of understanding. It allows companies like XYZ Manufacturing to determine taxable income based on actual cash flows, facilitating cash management and planning. This method reduces recordkeeping requirements since companies do not need to track receivables and payables actively, making it ideal for small to medium-sized businesses (IRS, 2022).

Another advantage is recognizing income only when received, which helps prevent overestimations of income in times of slow cash flow and provides a conservative approach to taxable income. It aligns well with the company's actual cash position, enabling easier budgeting and financial analysis (Rittenberg & Joseph, 2021).

However, other methods such as the accrual accounting method may offer advantages in recognizing income when earned and matching expenses to revenue, providing a more accurate picture of financial health, especially for larger or publicly traded companies (Kieso, Weygandt, & Warfield, 2020). Nonetheless, for XYZ, the simplicity and cash flow focus of the cash basis are major benefits.

Conclusion

This report provides comprehensive background information necessary for a one-day tax seminar addressing international students studying business in the U.S. It covers the core government programs supported by tax revenue—Social Security, Medicare, and National Defense—highlighting their funding sources and principles underlying taxation. Additionally, it explains the progressive tax rate structure, its advantages and disadvantages, and the essential primary and secondary sources used in tax research, emphasizing their authoritative hierarchy.

The detailed application of the cash basis to XYZ Manufacturing demonstrates how specific payments can be deducted or capitalized, highlighting the practical implications of choosing and applying the cash method of accounting. The analysis underscores the method’s benefits and limitations, providing students with a clear understanding of its strategic importance in business tax planning.

References

  • Centers for Medicare & Medicaid Services. (2023). Medicare & Medicaid spending. https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/reportingsystems/medicare-and-medicaid
  • Internal Revenue Service. (2022). Publication 538: Accounting Methods. https://www.irs.gov/publications/p538
  • Internal Revenue Service. (2023). Tax Brackets and Rates. https://www.irs.gov/newsroom/irs-announces-tax-brackets-for-2023
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate accounting (16th ed.). Wiley.
  • KPMG. (2022). Understanding IRS Revenue Rulings and Notices. https://home.kpmg/us/en/home/insights/2022/01/revenue-rulings-notices.html
  • Rittenberg, L., & Joseph, R. (2021). Financial and managerial accounting. McGraw-Hill Education.
  • Social Security Administration. (2022). Annual Statistical Report. https://www.ssa.gov/policy/docs/statcomps/annual/yearbook.html
  • U.S. Congress. (2017). Tax Cuts and Jobs Act. Public Law No: 115-97. https://www.congress.gov/bill/115th-congress/house-bill/1
  • U.S. Department of Defense. (2023). Budget Overview. https://comptroller.defense.gov/Budget-Materials/
  • Centers for Medicare & Medicaid Services. (2023). Medicare & Medicaid spending. https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/reportingsystems/medicare-and-medicaid

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