Taxation: CPA Tax Software Research Paper

Introduction

This income tax analysis incorporates the effects that the federal income taxes have impacted on the taxpayers. Under the income tax law analysis, different researches software tools have been made use of in solving the tax problems. Among the most famous tax software tools would be the ‘CPA tax software’, which is often used for both the reporting and planning in audit purposes. In fact, the CPA tax software facilitates accurate reporting on the company’s tax position.

Income taxation under both the legal and political environment analyzed

Both the political and legal frameworks of the federal governments directly impact on the enactment and legislation of various tax laws, especially in the United States. The implementations of the income tax law require the political and legal willpower of those who are in the leadership positions. These leaders are the law-makers who control the policies regarding the income taxation. For instance, the political leaders might pass laws that impose very stringent measures regarding the income taxes paid by the individual citizens.

Tax preparers’ ethical as well as the legal obligations

It is neither ethical nor legal for the tax preparers to engage in malpractices such as financial frauds, which are inconsistent with the prevailing tax laws. The tax preparers should not be involved in those activities, which are likely to lead to financial losses on both the parts of the individuals and the states in general. In fact, the tax preparers should not engage in either tax avoidance or tax evasion.

Tax law sources

The laws on income taxes in the United States of America come from different sources. These sources include, but not limited to the constitution of the United States, the Internal Revenue Code (IRC), treaties, opinions of the federal courts, and the treasury regulations, which are categorized under the first tier. On the other hand, the Internal Revenue Service (IRS) and the Public Administrative Rulings (PAR) are found under the second tier. Finally, the sources of the income tax laws include the legislative history and the Private Letter Rulings (PLR), which are found under the third tier.

Individual’s Income Taxes Computation

When calculating the income tax for an individual, the following procedure should be followed.

Mr. X

Income Tax Computation for the Year ended XXXX

The taxable income amount is taxed at the prevailing tax rate of the country.

However, the computation of the business income can be calculated as shown in the following table.

Income computation

For the year ended 31 December, XXXX

The following list provides some of the expenses that are allowed under the computation of income taxes. These specified ‘‘allowable’’ deductions, include, but not limited to the following:

1. Wear and tear deductions on qualifying costs. For example, the installment cost under the factory building qualifies.
2. Investment deductions on qualifying cots.
3. Farm works deductions on the qualifying costs.
4. Mining deductions on the qualifying costs.
5. Trade bad and doubtful debts, which the commissioner of income taxes considers or is even satisfied to have qualified to become ‘bad’ and ‘doubtful’ obligations.
6. Industrial building deductions on the qualifying costs.
7. Petroleum companies on the qualifying costs.
8. Capital expenditure incurred by a farmer so as to prevent soil erosion.
9. Legal costs incurred and stamp duty for the acquisition of lease of business premises.
10. Trading losses.

The list above is not exhaustive since it does not incorporate every item that is ‘‘allowable’’ under the calculation of income taxes. In essence, business losses are not taxed since they form part of the ‘‘allowable’’ deductions as witnessed in the above discussion list. However, personal losses that are not related to the business operations are taxed since they do not form part of the ‘‘allowable’’ items for deductions. In addition, reserves and provisions are not regarded as ‘‘allowable’’, under the income tax computation since they are not actual expenditures incurred in the course of running the business.

Application of the general rules

These rules concern the processes, which are followed in recording revenues. The recording processes are linked to the reporting requirements, accounting periods as well as the methods adopted. Under this method, the expenses incurred in running the businesses are often matched against the revenues earned from the trading transactions. The rule ascertains that revenues can only be recognized when they are actually earned. For example, the revenues can only be recognized at that particular time when the sales are made or at the moment the services are rendered. On the other hand, the revenues can as well be recognized during the production process or at the point where the production is completed. Therefore, it is important to realize that taxes should not be based on the expected revenues since these are mere speculations. The taxes are levied on the actual revenues earned by the business. This is why the reserves and provisions are never allowed in the computation of income taxes, owing to the fact that there is no actual movement of cash or expenditure incurred in the process.

According to the general rules, advances that have been received by the business are not ‘recognizable’ revenues, but are regarded as the liabilities because they are deferred incomes. They can only be recognized as revenues, under the general rules, once the following conditions have been met. First, the revenues should only be recognized on the condition that the cash and the cash claims to the receivable cash have been actually received as income for the transacted goods and services. On the other hand, the revenues can only be recognized once the assets received under such exchange transactions are easily converted into cash claims and cash. Second, the revenues cannot be earned before the actual goods and services have been rendered and transferred. Under this claim, the declaration for payments as well as the finished deliveries could be needed before the identification of the revenues would be made. This would not demand return provisions alone, but also the warranty claims.

Moreover, accrued revenues are treated differently in the sense that they regarded as the accrued assets. Such revenues can be on the goods and services delivered, but the payments are to be made at a later date. Notably, at the time of the delivery of the goods or services, the revenue is recognized, though its associated cash will be received in the next accounting period. The accounting treatment for the accrued revenue ascertains that it will be deducted from the accrued income during the next accounting period. On the other hand, the accrued revenue is treated as the accrued income in the current accounting period. In the company’s balance sheet, the accrued income is recognized as the non-current asset. The same characteristics of the accrued revenues shared with the pre-payments such as the deferred expenditures that include the prepaid expenses, are also recorded as non-current assets in the balance sheet of the company. In the profit and loss accounts of the companies, the pre-payments are not actually regarded as the expenses incurred in the business operations during that particular accounting year. Therefore, in the profit and loss account, the pre-paid expenses form part of the company’s income during the end of that particular financial year. These pre-payments are the amounts paid for the goods and services, which are destined to be received at a later date. Focusing on the taxation rules, just like the expenditure incurred by an individual to maintain himself/herself, his/her personal family, and domestic purposes, the prepayments are not ‘‘allowable’’ expenses. This is due to the fact that the prepayments form part of the company’s incomes, which are taxable.