Completion of Accounting Chapter Summaries

ACC 201: Essentials of Accounting

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Chapter 9: How do you Incorporate Taxes into the NPV/IRR Analysis?

What are the purposes of taxes?

Generating revenues to cover the public services,

wealth transfer

inducing desirable investments etc.

What are the ways the government earns tax revenues?

income taxes

property taxes

sales taxes

road taxes

capital taxes – made money in some place assuring happiness on both ends

import taxes

export taxes etc.

school taxes

How does tax evasion differ from tax avoidance?

Tax avoidance is legal although some avoidance strategies can be unethical .

Tax evasion, on the other hand, is illegal and can bring an entrepreneur a criminal conviction conviction .

What are the major determinants of the tax implications of an entrepreneur?

taxable Income and marginal Tax Rate

In general, Taxable Income = net cash flow - Tax Tax deductible Expenses – mortgage on your home

Marginal Tax Rate is the tax bracket the entrepreneur is at , which is based on his taxable income.

Tax income broken into low medium and high

This is the tax rate that will be applicable for incremental taxable income.

How do you calculate the tax liability of an entrepreneur?

Most entrepreneurial ventures begin as a sole proprietorship or partnership .

In this case, their business income is added to their other income and taxed together.

Also, there is much less paperwork the entrepreneur needs to worry about in this case.

What is the downside of sole proprietorships and partnerships?

A sole proprietorship or partnership is basically considered an extension of the entrepreneur.

As such, they expose the personal assets of the entrepreneur to business risk.

If the business goes under, the creditors can lay claim to owners’ personal assets.

RISKY!

How can the entrepreneur avoid this risk?

Entrepreneurs can separate themselves from the business by incorporating the business.

Such incorporation also makes it easier for the entrepreneur to funds from the capital market.

However, this requires the business to maintain financial statements and to have these statements audited.

In this case, both the corporation and the entrepreneur have to pay taxes separately.

Also, the dividends that is paid with after-tax money will get taxed again!

Will pay you dividends

So what is your recommendation?

Register the business as an LLC, known as the Limited Liability Company.

LLC while treating the entrepreneur and the business as the same , limits the liability of the entrepreneur.

This also involves minimal paperwork, well justifying the asset protection it brings.

It also avoids, the problem of the double taxation of dividends.

When then should an entrepreneur incorporate?

When she or he has to raise funds in the capital market.

Or take advantage of tax breaks (ex: S Corporation).