SOLUTION AND ANSWER GUIDE
SOUTH-WESTERN FEDERAL TAXATION 2026: ESSENTIALS OF TAXATION –
INDIVIDUALS & BUSINESS ENTITIES – 29TH EDITION
CHAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Problems.................................................................................................................................1
Bridge Discipline Problems .................................................................................................. 8
Research Problems ............................................................................................................... 9
Solutions To Becker CPA Review Questions .................................................................... 10
PROBLEMS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each
chapter [referring to the Glossary (Appendix C)], looking up the footnote resources to
the Internal Revenue Code, using chapter features (e.g., Global Tax Issues, Bridge
Discipline, Tax Planning Strategies, and Suggested Readings), examining the tax forms
referenced in the chapters, and completing additional end-of-chapter assignments. All
of these resources will help students engage more deeply with the materials and help
their understanding.
2. (LO 3, 9) Some tax and nontax considerations James should investigate include the
following:
• State and local income taxes.
• State and local sales taxes.
• State and local property taxes.
• Employee implications of the move (Will James lose current employees? Is the
labor market better in the new location? Is cost of living lower or higher in new
location?).
• Logistics/transportation of products to customers (specifically document lower
costs).
• State infrastructure (better in new location?).
• What is the cost of the move? What is the payback period/ROI for the move?
• What are real estate prices for new facilities in the new location?
• Are there any tax incentives from state or local agencies for relocating?
,3. (LO 2) A tax is regressive if it represents a larger percentage of the income of a low-
income taxpayer relative to the income of a high-income taxpayer. Examples of
regressive taxes include Federal employment taxes. A tax is progressive if it represents
a larger percentage of the income of a high-income taxpayer relative to the income of
a low-income taxpayer. The Federal income tax is an example of a progressive tax.
4. (LO 2, 6)
a. $24,467 {[($131,750 − $103,350) × 24%] + $17,651.50}.
b. 10%, 12%, 22%, 24%.
c. 24%.
d. 18.6% ($24,467 ÷ $131,750).
e. 16.7% ($24,467 ÷ $146,750).
5. (LO 2) Tax rates can be measured several ways with each providing different
information.
a. Tax burdens are best measured using the effective rate. First, by taking into
account the taxpayer’s entire tax liability, unlike the marginal or statutory rate, the
effective rate is a more comprehensive measure of tax burden. Second, by
comparing a taxpayer’s tax liability to its ability to pay, the effective rate avoids any
problems with differences in the measure of the tax base across taxpayers.
b. The best rate to use when assessing the return of a new investment is the
marginal rate. The marginal rate focuses only on the tax applicable to a taxpayer’s
additional, or marginal, income, ignoring the tax related to other income the
taxpayer may have.
6. (LO 2) Generally, a tax rate structure is determined by what happens to the tax rate as
the tax base increases. However, tax rates can be measured several ways, potentially
impacting how the rate structure might be viewed.
a. With respect to its marginal rates, a sales tax is proportional. The statutory rate is
the same regardless of the amount of purchases a taxpayer makes.
b. With respect to its average rates, a sales tax is proportional as the percentage of
sales paid in taxes remains the same regardless of the tax base, the amount of
purchases a taxpayer makes.
c. With respect to its effective rates, the sales tax can best be described as
regressive. Taxpayers with higher income and, therefore, ability to pay the tax
typically must spend less of that income with a greater ability to save or invest. By
spending a smaller portion of their income, higher-income taxpayers will pay a
smaller portion of their income in sales taxes.
7. (LO 3)
a. The parsonage probably was not listed on the property tax rolls because it was
owned by a tax-exempt church. Apparently the taxing authorities are not aware
that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay
back taxes but may eliminate future interest and penalties.
,8. (LO 1, 2) (See Digging Deeper 1.) As to Adam Smith’s canon on economy, the Federal
income tax yields a mixed result. From the standpoint of the IRS, economy exists as
collection costs are nominal (when compared with revenue generated). The
government’s cost of collecting Federal taxes amounts to less than one-half of 1
percent of the revenue collected. Economy is not present, however, if one looks to the
compliance effort and costs expended by taxpayers. According to recent estimates,
about 56% of individual taxpayers who file a return pay a preparer, and one-third
purchase tax software.
9. (LO 3) Jang probably will be required to pay the Washington use tax if, and when, he
applies for Washington license plates. In this case, the use tax probably is the same
amount as the Washington sales tax.
10. (LO 3) Although the Baker Motors bid is the lowest, from a long-term financial
standpoint, it is the likely the best. The proposed use of the property by the state and
the church probably will make it exempt from the school district’s ad valorem
property tax. The car dealership, on the other hand, would be subject to property
taxes, which would likely be in an amount, over time, that would exceed the difference
in the lower sales price.
11. (LO 3) Possible explanations are that Sophia made capital improvements (e.g., added a
swimming pool) to her residence and her parents became retirees (e.g., reached age 65).
12. (LO 5, 9) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
December 5, 2025
Cynthia Clay
1206 Seventh Avenue
Fort Worth, TX 76101
Dear Cynthia:
I am writing this letter to help you decide on what form of entity to choose for your
new food delivery business. In our phone conversation, you indicated that you expect
to have losses for the first two years in this business and then make substantial
profits in subsequent years. You and Marco also indicated that you are concerned
about potential personal liability.
While I can’t make a conclusive recommendation based on the information you have
given me, I can provide you with some general guidelines that should simplify your
decision. First, given your concern about personal liability, a partnership does not
appear to be a desirable option (you would both be personally liable for any injuries to
customers). Similarly, given your expectation of losses in the first two years, it does
not appear that a C corporation would be a desirable choice, at least initially. This is
because any losses in the corporation could only be used to offset future corporate
profits—you could not use the losses to immediately offset your personal tax liability.
Thus, two choices exist which provide limited liability and deductibility of losses on
your personal income tax return. These are the S corporation and the limited liability
company. If you choose an S corporation, we would probably convert the entity to a
C corporation when the business becomes profitable. At that point, profits would be
, taxed at the C corporation rate. A second tax would be levied on your personal income
tax return for any dividends paid by the corporation once it achieves C status. In
contrast, limited liability companies are taxed like partnerships—all income would be
taxed on your personal income tax return in profitable years. The relative desirability
of each of these two forms depends on a number of factors. One of the most
important factors in your situation is the relationship between your personal tax rate
and the tax rate of a C corporation. If you are in a high tax bracket and if the income in
the business is sufficiently low, you might be best off choosing the S corporation.
Alternatively, if you expect the business to generate a sufficiently large profit each
year, it might be best to choose the limited liability company. The qualified business
income deduction for income from flow-through entities along with the flat tax rate of
21% that applies to corporations also must be taken into consideration.
If you would like me to give you a clearer recommendation, we should meet at your
earliest convenience. If you have any additional questions, please call me.
Best regards,
Julian Jackson, CPA
13. (LO 5, 8)
a. Year 1 Year 2 Year 3
Corporate Tax Liability
Sales revenue $150,000 $320,000 $600,000
Cash expenses (30,000) (58,000) (95,000)
Depreciation (25,000) (20,000) (40,000)
Taxable income $ 95,000 $242,000 $465,000
Corporate tax liability $ 19,950 $ 50,820 $ 97,650
Cash Available for Dividends
Sales revenue $150,000 $320,000 $600,000
Tax-free interest income 5,000 8,000 15 ,000
Cash expenses (30,000) (58,000) (95,000)
Corporate tax liability (19,950) (50,820) (97,650)
Cash available for dividends $105,050 $219,180 $422,350
Ashley’s After-Tax Cash Flow
Dividend received $10 5,050 $2 1 9,180 $422,350
Tax on dividend at 15% rounded (1 5 ,758) (32,877) (63,353)
After-tax cash flow $ 89,292 $186,303 $358,997
PV of cash flow* $ 79,729 $1 48,521 $255,534
Total present value $483,784
*Present value factors (.8929, .7972, .7118) from Appendix E.
SOUTH-WESTERN FEDERAL TAXATION 2026: ESSENTIALS OF TAXATION –
INDIVIDUALS & BUSINESS ENTITIES – 29TH EDITION
CHAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Problems.................................................................................................................................1
Bridge Discipline Problems .................................................................................................. 8
Research Problems ............................................................................................................... 9
Solutions To Becker CPA Review Questions .................................................................... 10
PROBLEMS
1. (LO 1) Various answers are possible, including using the Key Terms at the end of each
chapter [referring to the Glossary (Appendix C)], looking up the footnote resources to
the Internal Revenue Code, using chapter features (e.g., Global Tax Issues, Bridge
Discipline, Tax Planning Strategies, and Suggested Readings), examining the tax forms
referenced in the chapters, and completing additional end-of-chapter assignments. All
of these resources will help students engage more deeply with the materials and help
their understanding.
2. (LO 3, 9) Some tax and nontax considerations James should investigate include the
following:
• State and local income taxes.
• State and local sales taxes.
• State and local property taxes.
• Employee implications of the move (Will James lose current employees? Is the
labor market better in the new location? Is cost of living lower or higher in new
location?).
• Logistics/transportation of products to customers (specifically document lower
costs).
• State infrastructure (better in new location?).
• What is the cost of the move? What is the payback period/ROI for the move?
• What are real estate prices for new facilities in the new location?
• Are there any tax incentives from state or local agencies for relocating?
,3. (LO 2) A tax is regressive if it represents a larger percentage of the income of a low-
income taxpayer relative to the income of a high-income taxpayer. Examples of
regressive taxes include Federal employment taxes. A tax is progressive if it represents
a larger percentage of the income of a high-income taxpayer relative to the income of
a low-income taxpayer. The Federal income tax is an example of a progressive tax.
4. (LO 2, 6)
a. $24,467 {[($131,750 − $103,350) × 24%] + $17,651.50}.
b. 10%, 12%, 22%, 24%.
c. 24%.
d. 18.6% ($24,467 ÷ $131,750).
e. 16.7% ($24,467 ÷ $146,750).
5. (LO 2) Tax rates can be measured several ways with each providing different
information.
a. Tax burdens are best measured using the effective rate. First, by taking into
account the taxpayer’s entire tax liability, unlike the marginal or statutory rate, the
effective rate is a more comprehensive measure of tax burden. Second, by
comparing a taxpayer’s tax liability to its ability to pay, the effective rate avoids any
problems with differences in the measure of the tax base across taxpayers.
b. The best rate to use when assessing the return of a new investment is the
marginal rate. The marginal rate focuses only on the tax applicable to a taxpayer’s
additional, or marginal, income, ignoring the tax related to other income the
taxpayer may have.
6. (LO 2) Generally, a tax rate structure is determined by what happens to the tax rate as
the tax base increases. However, tax rates can be measured several ways, potentially
impacting how the rate structure might be viewed.
a. With respect to its marginal rates, a sales tax is proportional. The statutory rate is
the same regardless of the amount of purchases a taxpayer makes.
b. With respect to its average rates, a sales tax is proportional as the percentage of
sales paid in taxes remains the same regardless of the tax base, the amount of
purchases a taxpayer makes.
c. With respect to its effective rates, the sales tax can best be described as
regressive. Taxpayers with higher income and, therefore, ability to pay the tax
typically must spend less of that income with a greater ability to save or invest. By
spending a smaller portion of their income, higher-income taxpayers will pay a
smaller portion of their income in sales taxes.
7. (LO 3)
a. The parsonage probably was not listed on the property tax rolls because it was
owned by a tax-exempt church. Apparently the taxing authorities are not aware
that ownership has changed.
b. Ethan should notify the authorities of his purchase. This will force him to pay
back taxes but may eliminate future interest and penalties.
,8. (LO 1, 2) (See Digging Deeper 1.) As to Adam Smith’s canon on economy, the Federal
income tax yields a mixed result. From the standpoint of the IRS, economy exists as
collection costs are nominal (when compared with revenue generated). The
government’s cost of collecting Federal taxes amounts to less than one-half of 1
percent of the revenue collected. Economy is not present, however, if one looks to the
compliance effort and costs expended by taxpayers. According to recent estimates,
about 56% of individual taxpayers who file a return pay a preparer, and one-third
purchase tax software.
9. (LO 3) Jang probably will be required to pay the Washington use tax if, and when, he
applies for Washington license plates. In this case, the use tax probably is the same
amount as the Washington sales tax.
10. (LO 3) Although the Baker Motors bid is the lowest, from a long-term financial
standpoint, it is the likely the best. The proposed use of the property by the state and
the church probably will make it exempt from the school district’s ad valorem
property tax. The car dealership, on the other hand, would be subject to property
taxes, which would likely be in an amount, over time, that would exceed the difference
in the lower sales price.
11. (LO 3) Possible explanations are that Sophia made capital improvements (e.g., added a
swimming pool) to her residence and her parents became retirees (e.g., reached age 65).
12. (LO 5, 9) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
December 5, 2025
Cynthia Clay
1206 Seventh Avenue
Fort Worth, TX 76101
Dear Cynthia:
I am writing this letter to help you decide on what form of entity to choose for your
new food delivery business. In our phone conversation, you indicated that you expect
to have losses for the first two years in this business and then make substantial
profits in subsequent years. You and Marco also indicated that you are concerned
about potential personal liability.
While I can’t make a conclusive recommendation based on the information you have
given me, I can provide you with some general guidelines that should simplify your
decision. First, given your concern about personal liability, a partnership does not
appear to be a desirable option (you would both be personally liable for any injuries to
customers). Similarly, given your expectation of losses in the first two years, it does
not appear that a C corporation would be a desirable choice, at least initially. This is
because any losses in the corporation could only be used to offset future corporate
profits—you could not use the losses to immediately offset your personal tax liability.
Thus, two choices exist which provide limited liability and deductibility of losses on
your personal income tax return. These are the S corporation and the limited liability
company. If you choose an S corporation, we would probably convert the entity to a
C corporation when the business becomes profitable. At that point, profits would be
, taxed at the C corporation rate. A second tax would be levied on your personal income
tax return for any dividends paid by the corporation once it achieves C status. In
contrast, limited liability companies are taxed like partnerships—all income would be
taxed on your personal income tax return in profitable years. The relative desirability
of each of these two forms depends on a number of factors. One of the most
important factors in your situation is the relationship between your personal tax rate
and the tax rate of a C corporation. If you are in a high tax bracket and if the income in
the business is sufficiently low, you might be best off choosing the S corporation.
Alternatively, if you expect the business to generate a sufficiently large profit each
year, it might be best to choose the limited liability company. The qualified business
income deduction for income from flow-through entities along with the flat tax rate of
21% that applies to corporations also must be taken into consideration.
If you would like me to give you a clearer recommendation, we should meet at your
earliest convenience. If you have any additional questions, please call me.
Best regards,
Julian Jackson, CPA
13. (LO 5, 8)
a. Year 1 Year 2 Year 3
Corporate Tax Liability
Sales revenue $150,000 $320,000 $600,000
Cash expenses (30,000) (58,000) (95,000)
Depreciation (25,000) (20,000) (40,000)
Taxable income $ 95,000 $242,000 $465,000
Corporate tax liability $ 19,950 $ 50,820 $ 97,650
Cash Available for Dividends
Sales revenue $150,000 $320,000 $600,000
Tax-free interest income 5,000 8,000 15 ,000
Cash expenses (30,000) (58,000) (95,000)
Corporate tax liability (19,950) (50,820) (97,650)
Cash available for dividends $105,050 $219,180 $422,350
Ashley’s After-Tax Cash Flow
Dividend received $10 5,050 $2 1 9,180 $422,350
Tax on dividend at 15% rounded (1 5 ,758) (32,877) (63,353)
After-tax cash flow $ 89,292 $186,303 $358,997
PV of cash flow* $ 79,729 $1 48,521 $255,534
Total present value $483,784
*Present value factors (.8929, .7972, .7118) from Appendix E.
