Question

Discuss the similarities and differences between the corporate and individual tax formulas.

Answer 1

Individual tax formula

STEP 1

Total income includes:
Salary, wages, fringe benefits
Net business income
Income from sole proprietorship
Income from partnership or S corporation
Investment income
Interest
Dividends
Capital gains
Rental income
Social Security benefits, Retirement distributions, Alimony received, Farm income or loss, Unemployment compensation, "Other income"

STEP 2

Adjusted gross income (AGI) equals total income less specific above-the-line deductions
AGI is an important number because many deductions and credits are limited by reference to AGI
These deductions are allowable even for taxpayers who do not itemize
Educator expense
½ SE tax
Tuition and fees
Student loan interest
Domestic production activities deduction
Alimony paid

STEP 3

Subtract the greater of:
standard deduction
allowable itemized deductions

STEP 4

ITEMIZED DEDUCTIONS

See Schedule A (Chapter 17 details)
Only 35% of individual filers elect to itemize their deductions
Bunching: if itemized deductions are close to standard deduction each year, the taxpayer should bunch deductions in alternate years
Examples:
Charitable contributions
Real estate taxes

In case of cotporate tax formula

It as follows

1. Profits earned from the business
2. Capital Gains
3. Income from renting property
4. Income from other sources like dividend, interest etc.
5. The tax rate depend upon each of counties