Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business

South-Western Federal Taxa�on 2024, Essen�als of Taxa�on, Individuals and Business En��es, 27e Nellen, Cuccia, Persellin, Young (Solu�ons Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters/Supplement files download link at the end of this file. 1 / 4

Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business

Entities 2024, 9780357900796; Chapter 1: Introduction to Taxation

1 © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Solution and Answer Guide

NELLEN, CUCCIA, PERSELLIN, YOUNG, SWFT ESSENTIALS OF TAXATION: INDIVIDUALS AND

BUSINESS ENTITIES 2024, 9780357900796; CHAPTER 1: INTRODUCTION TO TAXATION

TABLE OF CONTENTS

Problems .............................................................................................................................. 1 Bridge Discipline Problems ................................................................................................ 6 Research Problems ............................................................................................................. 7

PROBLEMS

• (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 the materials and help their understanding.

• (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 market better 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?).

• (LO 2) 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.

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Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business

Entities 2024, 9780357900796; Chapter 1: Introduction to Taxation

2 © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4. (LO 3)

• 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.

• Ethan should notify the authorities of his purchase. This will force him to pay back

taxes but may eliminate future interest and penalties.

• (LO 1, 2, 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.

• (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 4 in the textbook.

• (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.

• (LO 3) 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 December 5, 2023 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 3 / 4

Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business

Entities 2024, 9780357900796; Chapter 1: Introduction to Taxation

3 © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.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 into consideration.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)

• 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.

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