Author: Joseph Nacmias (CPA)
McGladrey & Pullen, LLP., Certified Public Accountants 
750 3rd Avenue, New York, NY 10017 

Telephone: (212) 297-4888 / Fax:  (212) 972-9088
E-Mail: Joseph_Nacmias@rsmi.com / http://www.mcgladrey.com

7.1 Income taxes

The U.S., most states and certain localities tax the net income of corporations, individuals, estates and certain types of trusts.

Generally, net income consists of the following items:

a.       Net financial statement income from a trade or business with certain modifications such as:

·          Amortization and depreciation, to the extent allowed by tax law;

·          Entertainment limited to 50% of costs;

·          Federal income tax not deductible,…

b.      Interest income with exclusions for government bond interest from certain income taxes;

c.       Dividend income with 70% to 100% exclusions for certain inter-corporate payments;

d.      Rents, royalties, pensions, annuities, etc.

e.       Salaries, wages, commissions, fees, etc.

f.        Gains on sales of stocks, bonds, land, buildings, artwork, etc. (Generally termed capital gains).

g.       Other miscellaneous gains, profits and income from most sources including lotteries, betting and “illegal” gains

Other types of trusts, partnerships, limited liability companies and certain corporations are considered “flow through” entities and they are not taxed as an entity; their income (or loss) is flowed through to their owners or beneficiaries who then report such income or loss on their own tax returns.

Tax rates presently in effect range as follows:

                *Phase-outs of lower brackets provide for uniform rates of 34% or 35% for corporations if taxable income exceeds certain levels.

                 **Capital gains are taxed between 18 and 28% depending on the holding period and the nature of the gain. Gains on sales of principal residences are exempt up to $500,000.

The federal government and certain states have «alternative minimum taxes» (AMT), under which certain types of deductions are not permitted; for example, the federal AMT system limits the utilization of prior years’ net operating losses to 90% of available amounts. The federal AMT rate is 20% for certain large companies and 26% and 28% for individuals.

Filling of returns and payment of income taxes

Tax returns of individuals are generally filed on a calendar year basis. Corporations generally may select an initial fiscal year ending with the last day of any month. Under certain circumstances a tax return may be for a period less than 12 months. A tax return period may never exceed 12 months.

Penalties will be applied with certain exceptions, if estimated tax paid plus withholding tax on wages is less than 90 to 110% of actual tax liability. Individuals must file a return 3-1/2 months after the end of their reporting year at which time any balance of tax must be paid (with interest).