Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
Instructor Guide
NELLEN, CUCCIA, PERSELLIN , ESSENTIALS OF TAXATION: INDIVIDUALS AND BUSINESS ENTITIES
2027, 9798214058344; C HAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Chapter Objectives........................................................................................................1
Chapter Outline.............................................................................................................1
Discussion Questions..................................................................................................17
Video Information......................................................................................................18
Related Cengage Video Content.............................................................................................................. 18
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the importance of taxes, how to study taxes, and how tax and finance professionals
work with taxes.
1.2 Explain the factors that impact the Federal tax law, and identify examples of their effect.
1.3 Describe the influence of the courts on the Federal tax system.
1.4 Explain the components of a tax.
1.5 Identify the various taxes affecting individuals and business entities.
1.6 Describe the basic income tax formula for individuals and business entities.
1.7 Explain how the income tax system applies to business entities and their owners.
1.8 Explain some of the ethical guidelines involved in tax compliance and planning.
1.9 Identify tax planning opportunities using a general tax-planning framework.
[return to top]
CHAPTER OUTLINE
In the outline below, each element includes references (in parentheses) to related content. “CO CH.##”
refers to the chapter objective; “PPT Slide #” refers to the slide number in the PowerPoint deck for this
chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for
each discipline, accreditation or certification standards (“BL 1.3.3”). Introduce the chapter and use the
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for
Chapter 1 (PPT Slides 2–4).
I. Taxes in Our Lives (1.1, PPT Slides 11–17)
i.
Various types of taxes, such as income, sales, property, and excise taxes, come into
play in many of the activities of individuals, businesses, nonprofit entities (like
charities), and governments themselves.
ii. Ultimately, all taxes are paid by individuals. The corporate income tax, for
example, is paid directly by corporations, but it really is paid indirectly by
individuals in their capacity as customers, owners, or employees of the corporation;
the taxes are passed along to individuals through higher prices for products and
services, lower dividends, and/or lower wages.
iii. Federal, state, and local elections often include initiatives that deal with taxation.
Candidates running for office often have ideas on tax changes they would like to
make if they are elected.
a. The Relevance of Taxation to Accounting and Finance Professionals
i. A corporation may devote 25% or more of its net income to pay income taxes, plus
it is subject to employment taxes, property taxes, sales taxes, and various excise
taxes. Corporations with international operations are also subject to taxation in
other countries.
ii. Given its significance, taxation is a crucial topic for accounting and finance
professionals serving individuals, businesses, and nonprofit entities. They must
understand the various types of taxes to assist effectively with:
1. Compliance: Ensuring that the business reports and pays its taxes accurately
and timely. Mistakes and late payments or filings will lead to penalties and
interest expense.
2. Planning: Helping a business understand how the incentives built into the tax
law may apply to them and what, if any, impact they may have on its
organization and operations. Effective tax planning can involve structuring a
company and its operations to minimize the amount of taxes paid, or to defer
when taxes must be paid.
3. Financial reporting: Financial statements include a significant amount of tax
information. Tax expense and deferred tax assets and liabilities are recognized
on the income statement and balance sheet, respectively. Additional
information including details regarding the composition of deferred tax assets
and liabilities, the company’s effective tax rate and why that rate differs from
the statutory tax rate, and the potential impact of tax law uncertainly on tax
expense is disclosed in the financial statement footnotes.
4. Environmental, Social, and Governance (ESG) reporting: A growing trend in
corporate reporting is to address various business sustainability and
responsibility matters and report environmental, social, and governance
activities and their impact on the company and its investors. These metrics can
include the taxes paid in each country in which the company operates (part of
“country-by-country reporting”), a reconciliation between taxes paid and the
statutory tax rate on financial statement profits, any financial assistance
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
received from governments via tax deductions and credits, and an explanation
of the corporation’s tax policy and strategy.
5. Controversy: Assist when the taxpayer interacts with a tax agency (like the
IRS). The IRS and state and local tax agencies regularly examine (audit) tax
returns to verify that taxes were properly computed and paid. Tax practitioners
may represent a taxpayer before the IRS (or other tax agency) to assist with an
audit or to provide answers to questions the tax agency has asked the taxpayer.
6. Cash management: Taxes must be paid on time to avoid penalties and interest.
Income taxes must be estimated and paid quarterly and reconciled on the
annual return. Other taxes may be due weekly, monthly, quarterly, or
semiannually. Businesses must be sure they have the funds ready when the
taxes are due and have procedures to track due dates.
7. Data analysis: With a majority, if not all, of a company’s records maintained in
digital form, there are opportunities to use this information to enhance profits,
better understand the customer base, and improve and understand the
information from a tax perspective. Tax practitioners often need skills in data
analysis and visualization to identify samples for both internal and external
audits, find ways to identify the products and services subject to sales tax in
different states, and extract tax data to help inform other business functions,
such as where to locate a new sales office. The IRS and state tax agencies also
use data analysis to help identify potential audit issues.
8. Tax advocacy: Taxpayers and tax practitioners can add tremendous value to the
improvement and evolution of our tax laws by sharing their knowledge,
experiences, and ideas with lawmakers and tax agencies. This input might take the
form of comment letters, testimony before legislative committees (delivered in
person or submitted for the record), or individual correspondence and meetings.
iii. The level and depth of tax knowledge needed for any accounting or tax
professional depends on their specific job.
iv. It is essential to maintain a balanced perspective when working with tax systems.
While taxation is often a significant factor in many decisions, it remains one of
many when considering how best to achieve one’s goals.
b. Studying Taxation
i. The goal of studying taxation is to be able to recognize issues or transactions that have
tax implications and, when possible, to determine what those implications are.
ii. Taxation is an important and exciting topic due to its relation to the government’s
ever-changing economic, social, and political goals and its significance to the
bottom line of a company and an individual’s finances.
iii. One should focus not only on memorizing numerous rules and terms, of which
there are many, but on understanding the rules, the reasons for them, and their
potential impact on taxpayers’ behavior. Aiming for understanding, rather than
memorization, will make your journey into the world of taxation interesting and
meaningful, and prepare you well for recognizing and managing the tax issues that
will inevitably arise in your accounting or finance career.
iv. Concept Summary 1.1 in the text illustrates how individuals interact with taxes.
II. Understanding the Federal Tax Law (1.2, PPT Slides 18–24)
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
i.The Federal tax law is shaped by all three branches of our Federal government. It is a
mixture of laws passed by Congress, explanations provided by the Treasury
Department and the Internal Revenue Service (IRS), and interpretations of the law by
the courts.
a. Revenue Needs
i. In an ideal world, taxes raised by the government would equal the expenses
incurred by government operations.
ii. The U.S. Constitution, however, allows deficit spending, and politicians often find
it hard to resist the temptation to spend more than the Federal tax system collects.
b. Economic Considerations
i. The tax system is often used to help achieve economic goals. For example, tax rates
may be increased or reduced in the hopes of reducing or increasing economic
activity generally.
ii. Encouragement of Certain Activities. Congress often uses the tax law to encourage
specific types of economic activity.
1. A tax benefit for research and development expenditures may lead to enhanced
research activity. Innovation might also be encouraged by providing
preferential tax rates on the sale of licenses and patents.
2. Ecological considerations justify a tax provision that permits a more rapid
expensing of the costs of installing pollution control facilities or making
buildings more energy efficient or tax credits for the production or use of
alternative energy.
3. Saving can lead to capital formation, making funds available to finance home
construction and industrial expansion. The tax law encourages saving by
granting preferential treatment to private retirement plans.
iii. Encouragement of Certain Industries.
1. The tax law is sometimes used to encourage specific industries. For example,
the Federal tax law has long been used to assist agriculture. Among the tax
benefits are the election to expense rather than capitalize certain soil and water
conservation expenditures and fertilizers, and the election to defer the
recognition of gain on the receipt of crop insurance proceeds.
2. The tax law favors the development of natural resources by allowing taxpayers
to accelerate the deduction of certain exploration costs.
3. To encourage the manufacture of semiconductors, the Advanced
Manufacturing Investment Credit provides a tax benefit for investing in
qualified property used in the activity.
iv. Encouragement of Small Business. The tax law includes several rules favorable to
small business and their owners. These include the increased availability of
accelerated depreciation for the business and the ability of its owners to exclude
from tax gains on the sale of the business.
c. Social Considerations
i. Some provisions of the Federal tax law, particularly those dealing with individuals,
can be explained by a desire to encourage certain behavior to help address social
concerns.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
Introduction to Taxation
Instructor Guide
NELLEN, CUCCIA, PERSELLIN , ESSENTIALS OF TAXATION: INDIVIDUALS AND BUSINESS ENTITIES
2027, 9798214058344; C HAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Chapter Objectives........................................................................................................1
Chapter Outline.............................................................................................................1
Discussion Questions..................................................................................................17
Video Information......................................................................................................18
Related Cengage Video Content.............................................................................................................. 18
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Explain the importance of taxes, how to study taxes, and how tax and finance professionals
work with taxes.
1.2 Explain the factors that impact the Federal tax law, and identify examples of their effect.
1.3 Describe the influence of the courts on the Federal tax system.
1.4 Explain the components of a tax.
1.5 Identify the various taxes affecting individuals and business entities.
1.6 Describe the basic income tax formula for individuals and business entities.
1.7 Explain how the income tax system applies to business entities and their owners.
1.8 Explain some of the ethical guidelines involved in tax compliance and planning.
1.9 Identify tax planning opportunities using a general tax-planning framework.
[return to top]
CHAPTER OUTLINE
In the outline below, each element includes references (in parentheses) to related content. “CO CH.##”
refers to the chapter objective; “PPT Slide #” refers to the slide number in the PowerPoint deck for this
chapter (provided in the PowerPoints section of the Instructor Resource Center); and, as applicable for
each discipline, accreditation or certification standards (“BL 1.3.3”). Introduce the chapter and use the
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
Ice Breaker in the PPT if desired, and if one is provided for this chapter. Review learning objectives for
Chapter 1 (PPT Slides 2–4).
I. Taxes in Our Lives (1.1, PPT Slides 11–17)
i.
Various types of taxes, such as income, sales, property, and excise taxes, come into
play in many of the activities of individuals, businesses, nonprofit entities (like
charities), and governments themselves.
ii. Ultimately, all taxes are paid by individuals. The corporate income tax, for
example, is paid directly by corporations, but it really is paid indirectly by
individuals in their capacity as customers, owners, or employees of the corporation;
the taxes are passed along to individuals through higher prices for products and
services, lower dividends, and/or lower wages.
iii. Federal, state, and local elections often include initiatives that deal with taxation.
Candidates running for office often have ideas on tax changes they would like to
make if they are elected.
a. The Relevance of Taxation to Accounting and Finance Professionals
i. A corporation may devote 25% or more of its net income to pay income taxes, plus
it is subject to employment taxes, property taxes, sales taxes, and various excise
taxes. Corporations with international operations are also subject to taxation in
other countries.
ii. Given its significance, taxation is a crucial topic for accounting and finance
professionals serving individuals, businesses, and nonprofit entities. They must
understand the various types of taxes to assist effectively with:
1. Compliance: Ensuring that the business reports and pays its taxes accurately
and timely. Mistakes and late payments or filings will lead to penalties and
interest expense.
2. Planning: Helping a business understand how the incentives built into the tax
law may apply to them and what, if any, impact they may have on its
organization and operations. Effective tax planning can involve structuring a
company and its operations to minimize the amount of taxes paid, or to defer
when taxes must be paid.
3. Financial reporting: Financial statements include a significant amount of tax
information. Tax expense and deferred tax assets and liabilities are recognized
on the income statement and balance sheet, respectively. Additional
information including details regarding the composition of deferred tax assets
and liabilities, the company’s effective tax rate and why that rate differs from
the statutory tax rate, and the potential impact of tax law uncertainly on tax
expense is disclosed in the financial statement footnotes.
4. Environmental, Social, and Governance (ESG) reporting: A growing trend in
corporate reporting is to address various business sustainability and
responsibility matters and report environmental, social, and governance
activities and their impact on the company and its investors. These metrics can
include the taxes paid in each country in which the company operates (part of
“country-by-country reporting”), a reconciliation between taxes paid and the
statutory tax rate on financial statement profits, any financial assistance
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
received from governments via tax deductions and credits, and an explanation
of the corporation’s tax policy and strategy.
5. Controversy: Assist when the taxpayer interacts with a tax agency (like the
IRS). The IRS and state and local tax agencies regularly examine (audit) tax
returns to verify that taxes were properly computed and paid. Tax practitioners
may represent a taxpayer before the IRS (or other tax agency) to assist with an
audit or to provide answers to questions the tax agency has asked the taxpayer.
6. Cash management: Taxes must be paid on time to avoid penalties and interest.
Income taxes must be estimated and paid quarterly and reconciled on the
annual return. Other taxes may be due weekly, monthly, quarterly, or
semiannually. Businesses must be sure they have the funds ready when the
taxes are due and have procedures to track due dates.
7. Data analysis: With a majority, if not all, of a company’s records maintained in
digital form, there are opportunities to use this information to enhance profits,
better understand the customer base, and improve and understand the
information from a tax perspective. Tax practitioners often need skills in data
analysis and visualization to identify samples for both internal and external
audits, find ways to identify the products and services subject to sales tax in
different states, and extract tax data to help inform other business functions,
such as where to locate a new sales office. The IRS and state tax agencies also
use data analysis to help identify potential audit issues.
8. Tax advocacy: Taxpayers and tax practitioners can add tremendous value to the
improvement and evolution of our tax laws by sharing their knowledge,
experiences, and ideas with lawmakers and tax agencies. This input might take the
form of comment letters, testimony before legislative committees (delivered in
person or submitted for the record), or individual correspondence and meetings.
iii. The level and depth of tax knowledge needed for any accounting or tax
professional depends on their specific job.
iv. It is essential to maintain a balanced perspective when working with tax systems.
While taxation is often a significant factor in many decisions, it remains one of
many when considering how best to achieve one’s goals.
b. Studying Taxation
i. The goal of studying taxation is to be able to recognize issues or transactions that have
tax implications and, when possible, to determine what those implications are.
ii. Taxation is an important and exciting topic due to its relation to the government’s
ever-changing economic, social, and political goals and its significance to the
bottom line of a company and an individual’s finances.
iii. One should focus not only on memorizing numerous rules and terms, of which
there are many, but on understanding the rules, the reasons for them, and their
potential impact on taxpayers’ behavior. Aiming for understanding, rather than
memorization, will make your journey into the world of taxation interesting and
meaningful, and prepare you well for recognizing and managing the tax issues that
will inevitably arise in your accounting or finance career.
iv. Concept Summary 1.1 in the text illustrates how individuals interact with taxes.
II. Understanding the Federal Tax Law (1.2, PPT Slides 18–24)
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Instructor Guide: Nellen, Cuccia, Persellin, Essentials of Taxation: Individuals and Business Entities 2027, 9798214058344; Chapter 1:
Introduction to Taxation
i.The Federal tax law is shaped by all three branches of our Federal government. It is a
mixture of laws passed by Congress, explanations provided by the Treasury
Department and the Internal Revenue Service (IRS), and interpretations of the law by
the courts.
a. Revenue Needs
i. In an ideal world, taxes raised by the government would equal the expenses
incurred by government operations.
ii. The U.S. Constitution, however, allows deficit spending, and politicians often find
it hard to resist the temptation to spend more than the Federal tax system collects.
b. Economic Considerations
i. The tax system is often used to help achieve economic goals. For example, tax rates
may be increased or reduced in the hopes of reducing or increasing economic
activity generally.
ii. Encouragement of Certain Activities. Congress often uses the tax law to encourage
specific types of economic activity.
1. A tax benefit for research and development expenditures may lead to enhanced
research activity. Innovation might also be encouraged by providing
preferential tax rates on the sale of licenses and patents.
2. Ecological considerations justify a tax provision that permits a more rapid
expensing of the costs of installing pollution control facilities or making
buildings more energy efficient or tax credits for the production or use of
alternative energy.
3. Saving can lead to capital formation, making funds available to finance home
construction and industrial expansion. The tax law encourages saving by
granting preferential treatment to private retirement plans.
iii. Encouragement of Certain Industries.
1. The tax law is sometimes used to encourage specific industries. For example,
the Federal tax law has long been used to assist agriculture. Among the tax
benefits are the election to expense rather than capitalize certain soil and water
conservation expenditures and fertilizers, and the election to defer the
recognition of gain on the receipt of crop insurance proceeds.
2. The tax law favors the development of natural resources by allowing taxpayers
to accelerate the deduction of certain exploration costs.
3. To encourage the manufacture of semiconductors, the Advanced
Manufacturing Investment Credit provides a tax benefit for investing in
qualified property used in the activity.
iv. Encouragement of Small Business. The tax law includes several rules favorable to
small business and their owners. These include the increased availability of
accelerated depreciation for the business and the ability of its owners to exclude
from tax gains on the sale of the business.
c. Social Considerations
i. Some provisions of the Federal tax law, particularly those dealing with individuals,
can be explained by a desire to encourage certain behavior to help address social
concerns.
© 2027 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
