This essay is going to summarize the sources of modern income tax statutes, summarize the objectives of modern income tax statutes and compare and contrast generally accepted accounting principles. There are three sources of modern income tax statutes which are legislative, executive and judicial. In this paper only the legislative and the executive will be discussed. The Internal Revenue Code, which consists of statutory provisions relating to Federal taxation, only existed as individual revenue acts before 1939. In 1939 congress put in place the federal tax laws.
This codification arranged all Federal tax provisions in a logical sequence and placed them in a separate part of the Federal statutes. Two more such rearrangements took place in 1954 and 1986. The Internal Revenue Code of 1 986 is the latest which resulted in substantial changes, only a minority of the statutory provisions was affected. Statutory amendments to the tax law are incorporated into the code. Examples include the Taxpayer Relief Act (TRAP) of 1 997, the Internal Revenue Service Restructuring and Reform Act of 1 998 and American Jobs Creation Act of 2004 (Hoffman, peg 2-3).
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The typical legislative process for tax ills by and large initiates in the House Ways and Means Committee in the House of Representatives. However, tax bills originating in the senate are attached as riders to other legislative propositions. After both the House of Representatives and the Senate work out the dissimilarities in the Joint Conference Committee and is passed by the House and Senate, the tax bill then goes for approval or rejection by the President. If the President approves or the President rejection is overridden, then the tax bill is incorporated into the code (Hoffman, peg 2-4).
The Committee reports from the House Ways and Means, Senate Finance and the Joint Conference committee frequently explains or gives insight to the intent of congress. The first administrative source of the tax law discussed is the Treasury Department Regulations. The regulations expand on the meaning and application of the Code. Regulations are issued in three forms which are projected, temporary, and final. The Regulations interpret the code and are thereafter followed in the same sequence as the code (Hoffman, page 2-8, 2-9).
Another administrative source is Revenue Ruling and Revenue Procedures. “Revenue ruling are official renouncement’s of the National Office of the IRS,” states Hoffman. Revenue Rulings main purpose is to provide interpretation of the tax laws. Revenue procedures focus with the internal management practices and procedures of the IRS. Revenue Rulings and Revenue Procedures are published weekly by the U. S. Government in the Internal Revenue Bulletin (I. R. B. ). The last administrative source of tax bill is briefly talked about is Treasury Decisions (Ads).
Ads are issued by the Treasury Department, which function the same Way as Revenue Rulings and Revenue Procedures, which is to circulate new isolations, amend or change existing regulations and on selected court decisions. Treasury Decisions are published weekly by the Internal Revenue Bulletin (Hoffman, peg 2-12). There are five main objectives of modern income tax statutes, which are revenue needs, economic considerations, social considerations, equity considerations, and lastly political considerations. The main purpose for enacting tax legislation in 191 3 was to obtain revenue for governmental needs (Aren’t, 485).
Congress in most cases uses the concept of revenue neutrality when it comes to tax legislation, which basically means hat changes made will neither increase nor decrease the net result (Hoffman, peg 1-24). Economic considerations fall into four categories, which are control Of the economy, encouragement of certain activities, encouragement Of certain industries, and the encouragement of small business. Depreciation write-off is an example for controlling the economy. The favorable treatment of research and development expenses falls into the area of encouragement of certain activities.
Farmers in the agriculture industry are granted special treatment in the Federal tax system (Hoffman, peg 1-??26). Lastly, small equines corporations have the benefit of avoiding corporate income taxes. Social considerations provided by Federal tax law include medical benefits to employees that are nontaxable to employees, pension or profit sharing plans contributions and earnings are not taxed to the employee until the funds are distributed, tax deductions for charitable contributions, and tax credits for minors or disable dependents (Hoffman, peg 1-27).
A prime example of equity consideration is allowing a deduction for state and local income tax, which alleviates the effect Of multiple taxation. The wherewithal to pay concept is another major objective. The wherewithal to pay concept simply recognized the inequality of taxing a transaction when the taxpayer lacks the means with which to pay (Hoffman, peg 1-28). The reasoning is the taxpayer’s economic position has not significantly changed from the transaction. The last equity consideration is coping with inflation.
Since income tax is progressive and to counter bracket creep, Congress countered this by adjusting the various income tax components such as tax brackets, standard deduction amounts and personal and dependency exemptions, through an indexation procedure. The final objective of modern income tax statues is political considerations. Special interest legislation is mostly explained by political influence from pressure groups (Hoffman, peg 1-30). One example is prepaid subscriptions and dues income is not taxed until earned while prepaid rents are taxed to the landlord in the year received.
Generally accepted accounting principles (GAP) pretax financial income is referred to as income before taxes, income for financial reporting purposes, or income for book purposes. Pretax financial income is determined according to GAP and is measured with the objective of providing useful information to investors and creditors. The income tax expense in computed from the pretax financial information using GAP. A defining characteristic of GAP is full accrual method is used to report revenue for financial reporting (Skies 961).
In tax accounting, taxable income is the term used to indicate the amount which income tax payable in calculated. Taxable income is determined according to the internal revenue code. Distinctiveness of tax accounting is modified case basis and cash availability concept, which are placed in the code. Aren’t points out the reasoning for cash basis tax accounting, “Pay the tax when you have the eying power (cash), in spite of the fact that income, by any reasonable definition of the term, has been realized in some instances and not in other,” (Aren’t 486).
A major example where tax accounting conflicts with GAP is depreciation. The purpose of depreciation accounting by GAP is distributing the cost or other basic value Of tangible capital assets, less salvage, over estimated useful life of the unit. The goal in deciding the best method is allocating the costing a manner, which reasonably approximates the speed at which the service utility of the asset is being consumed (Aren’t 487). In contrast the objective of the taxation policy is providing economic growth through investment stimulation. Allowing accelerated depreciation deductions for tax purposes is to stimulate investment in new capital equipment, not because that purposes is to stimulate investment in new capital equipment, not because that procedure results in a better matching of expenses and revenues, “states that procedure results in a better matching of expenses and revenues,” states Aren’t (Aren’t 488). In conclusion, the legislation, administrative, and judicial branches of government each nutrient to tax statutes creation, interpretation and dispute.