Taxation for Decision Makers, 2012 Edition

chapter 1

An Introduction to Taxation

CHAPTER OUTLINE

Setting the Stage—An Introductory Case

An Introduction to Taxation

The Taxing Units and the Basic Income Tax Models

Choice of Business Entity

Other Types of Taxes

Types of Tax Rate Systems

Characteristics of a Good Tax

Revisiting the Introductory Case

Summary

Key Terms

Test Yourself

Problem Assignments

Answers to Test Yourself

This chapter presents an overview of income taxation and of taxation in general as a backdrop to the more detailed provisions of the tax laws that follow in subsequent chapters. In reading this chapter, you should not be concerned with where the numbers come from. Instead, you should focus on developing a broad understanding of how the U.S. tax system works.

After defining a tax and providing some background information on the income tax, this chapter introduces those taxable persons that pay income taxes—individuals, C corporations, and fiduciaries. The concepts of gross income, taxable income, tax rates, gross tax liability, and tax credits are introduced in the context of both the corporate and individual tax models. The individual tax model includes several unique features, including adjusted gross income, deductions for adjusted gross income, deductions from adjusted gross income, and personal and dependency exemptions. Some of the basic concepts related to property transactions are also introduced.

The various types of business entities, including sole proprietorships, partnerships, C corporations, ...