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Tax Accounting

Tax Accounting essay sample

Taxation is a source of government revenue collected through levying or imposing charges on corporate organizations and citizens of the country. The government may use taxation to encourage or discourage the country's economic decisions. Taxation has several principles that guide the government when formulating its tax regime. The first principle is the principle of broad-basing, which requires that taxes are spread across every sector of the country's economy and among all citizens. The principle of adequacy requires that taxes collected should be enough to cater for the provision of public goods and services. The principle of equity states that taxes should be distributed equitably to individuals and corporate companies, which have the same economic state. Last but not the least is the principle of neutrality, which states that t no sector of the economy or individuals should be given an undue advantage over another (Hoffman, Raabe, Smith, Maloney, & Young, 2013).

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Question 1: Taxation and Accounting of Partnership Companies

Partnership companies are legal business operations established by two or more individuals with the sole purpose of sharing both management obligations and profits. Partnerships are usually of two types, namely: general partnerships and limited partnerships. The accounting part of partnerships is different from that of corporations. Partnerships usually maintain three types of accounts: the capital account, drawing account, and the partner's loan account (Hoffman et al., 2013).

The capital account records the initial equity contributed by the partnership members before the start of the business. It may include assets, which are brought into the business, usually calculated at the fair market value. Subsequent addition of equity and assets into a company is recorded into the account. The value of the account determines the share of profit to be earned in accordance with partnership agreements. The partners' loan account records the money borrowed by the partner from the business as a loan.

Unlike the loan account, drawings account records cash withdrawals by the partner that is deducted from the partner's yearly profits from the business. These withdrawals are normally made without the intention of returning them to the business. When it comes to taxation of partnerships, even though they are legal entities with the owners, the partners are usually taxed individually (Hoffman et al., 2013). This means the earnings they generate from each person's share are taxed individually whether it has been shared out or not. This is a great disadvantage to the owners of businesses compared to corporates who have a standard rate of taxation.

Question 2: Taxation and Accounting for S Corporations

S corporations are organizations elected to forward their losses, incomes, deductibles, and credits to shareholders for purposes of taxation. All these activities are passed over to shareholders who in turn computer and file them as individual personal tax returns. This only means that these corporations pay taxes at individual tax rates. This is advantageous to them since the issue of double taxation is avoided. This is because shareholders' company will not be taxed; these are individuals in the organization who will be taxed (Thompson, 1995).

As a state requirement, S corporations need to maintain accurate and complete records of their total incomes, expenses, and capital investments. In most cases, the corporation is required to report all its incomes and expenses for the whole year at the corporate level. It is also at this level that all the total incomes and expenses are identified and their nature is found. This ensures that correct share of profits for each individual member is correctly recorded for income tax purposes. The business is also required to maintain records of shareholder investment in equity or assets. These records are used for internal revenue services to establish what shares each person owns in the company for taxation purposes. Another important aspect of these corporations is the strict requirement that all net incomes must be divided according to the shareholder's capital contributions at the beginning of the company's life and when the company is in operation.

Question 3: Taxation and Accounting of C Companies

C companies are legal entities operating separately from their owners. They are normally found as separate legal entities to cushion shareholders against legal and financial liabilities. In case of these liabilities, the company itself is usually liable. In accounting for the C Corporation, the business is assumed to be a going concern business, which only means that it will continue to exist even if one or two of its shareholders leave the company (Hoffman, Raabe, Smith, & Maloney, 2007). This means that, in terms of accounting for its incomes and expenditure, there are always plans for an established future.

On an annual basis, the business has to produce its annual accounts and present them to the shareholders of the company. Also, as a part of the state regulations, the organization is supposed to present audited financial statements for taxation purposes. Auditing must be done by an independent auditor. The auditor should not be an employee of the business (Hoffman et al., 2007). This type of business is advantageous as the number of shareholders admitted is limitless and there are a lot of opportunities for growth, which stem from its ability to sell its shares without government interference, thus being able to raise more capital for expansion. Taxation is usually done at a corporate level with a fixed rate of deductibles from the net incomes. The only existing disadvantage concerns corporate earnings taxation. Dividends payable to shareholders are also taxable.

References

Hoffman, W., Raabe, W., Smith, J., & Maloney, D. (2007). West federal taxation 2008: Corporations, partnerships, estates and trusts. New York, NY: Cengage Learning.

Hoffman, W., Raabe, W., Smith, J., & Maloney, D., & Young, J. C. (2013). South-western federal taxation 2014: Corporations, partnerships, estates and trusts. New York: Cengage Learning.

Thompson, S. C. (1995). Basic federal income taxation of partnerships and S corporations. New York, NY: West.

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