From the course: Finance for Non-Financial Managers

Understanding income taxes

From the course: Finance for Non-Financial Managers

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Understanding income taxes

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- Even numbers people can be scared of income taxes. - Taxes make us nervous because we're not sure we understand all the tax implications of our business decisions. - It is of critical importance to engage a professional when in doubt. - But with that said, an overview of the purpose of the income tax system can take some of the edge off of our fears. - Income taxes influence almost every decision that's made in a business. - Okay, so what is an income tax? - An income tax is a required payment to a government based on the amount of a person's income or a company's profit. - Seems such a simple statement. Like, why is there so much controversy and intrigue right there in that simple statement? - For example, to what government? The government where I live, the government where I earn my money, or the government of which I'm a citizen? - [Earl] So the question of to what government needs to be defined in the income tax accounting rules. - [Jim] And how is the amount of income tax computed? Based on a simple percentage of income, based on an increasing percentage? Are all types of income taxed equally? - [Earl] Yeah, and finally, how is that taxable income or profit defined? Are there allowable expenses that can be subtracted in the computation of that income? - Now, income taxes are an important tax, but they're not the only tax. - [Earl] There are sales taxes and value-added taxes and property taxes and payroll taxes and usage taxes and estate taxes and more. - So income taxes are not the only tax, but they are a relatively large and controversial tax. - And computing our income taxes is what makes most of us especially nervous. Now, why is that? - Why, because the income tax code, regulations, interpretations, and legislative history in the United States occupies over 70,000 pages. Now, note, people often say that the legal tax code itself is just 7,000 pages. - Yeah, well, 7,000 pages, that still seems like a lot to us. - We are accounting professors, for heaven sakes, and we both still have to use online tax preparation products to help us with our income taxes. - Now, we don't all need to be tax experts, but we should all be familiar with basic income tax issues such as tax brackets, tax rates, and the difference between tax deductions and tax credits, to name a few. - Again, our objective here is to not make you tax experts, but instead, it's to provide information to make you a more informed decision maker.

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