,SOLUTION MANUAL FOR South-Western Federal
Taxation 2025 Essentials of Taxation Individuals
and Business Entities 28th Edition by Annette
Nellen
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
Solution and Answer Guide
NELLEN, CUCCIA, PERSELLIN, YOUNG, SWFT ESSENTIALS OF TAXATION: INDIVIDUALS AND
BUSINESS ENTITIES 2025, 9780357989197; CHAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Problems ..............................................................................................................................1
Bridge Discipline Problems ................................................................................................ 7
Research Problems ............................................................................................................. 8
Solutions To Becker CPA Review Questions ..................................................................... 9
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 in Appendix D, using chapter features (e.g., Global Tax
Issues, Ethics & Equity, Tax Planning, and Digging Deeper), examining the tax forms
used 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, 5, 6) 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 if you relocate?
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
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 sales and excise 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 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.
5. (LO 1, 2, 6) (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.
6. (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. See the discussion in connection with Example 4
in the textbook.
7. (LO 3) Although the Baker Motors bid is the lowest from a long-term financial
standpoint, it is 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 tax. This
would hardly be the case with a car dealership. In fact, commercial properties (e.g., car
dealerships) often are subject to higher tax rates.
8. (LO 3) A possible explanation is that Sophia made capital improvements (e.g., added a
swimming pool) to her residence and her parents became retirees (e.g., reached age 65).
9. (LO 5, 6) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
December 5, 2024
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.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
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
10. (LO 5, 6)
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 1 5,000
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
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 3
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
Year 1 Year 2 Year 3
Ashley’s After-Tax Cash Flow
Dividend received $10 5,050 $21 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 $148,521 $255,534
Total present value $483,784
*Present value factors (.8929, .7972, .7118) from Appendix E.
b. Year 1 Year 2 Year 3
Individual 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
Individual tax liability** $ 23,750 $ 60,500 $1 1 6,2 50
**Rate = 25%
Ashley’s After-Tax Cash Flow
Sales revenue $1 50 ,000 $320,000 $600,000
Tax-free interest income 5,000 8,000 1 5,000
Cash expenses (30,000) (58,000) (95,000)
Individual tax liability (23,750) (60,500) (116,250)
After-tax cash flow $1 0 1 ,250 $209,500 $403,750
PV of cash flow* $ 90,406 $16 7,0 1 3 $287,389
Total present value $544,808
*Present value factors (.8929, .7972, .7118) from Appendix E.
c. If Ashley wants to have access to all available cash from the business, then she
will have to pay out dividends annually. As seen in the answers to parts a. and b.
above, the present value of future cash flows is substantially greater if she does
not incorporate under this assumption. Alternatively, if she does not need to pay
out dividends, then she may be better off by incorporating, since only the
corporate tax will be incurred, which is less than her individual tax. The value of
her stock will increase and she then can sell the stock at a later date at favorable
capital gains rates.
11. (LO 1) PowerPoint presentations will vary. In favor of high progressivity:
• Ability to pay.
• Fairness of result.
• Benefits of government skew toward those at upper-income levels.
Contrary to high progressivity:
• Discouragement of work and innovation.
• Unfairness of result.
• Civic engagement by those at lower-income levels requires “skin in the game.”
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 4
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
12. (LO 3)
a. In terms of taxpayer compliance, an ad valorem tax on personalty is less desirable
than one on realty. However, a tax on business personalty, such as inventory, is to
be preferred over one on personal use (i.e., nonbusiness) personalty.
b. A tax on stock and bonds would be too easily avoided. The taxing authority would
have no means of ascertaining ownership of these assets.
c. Poor taxpayer compliance is to be expected for any tax on personal use personalty.
However, if boats had to be periodically licensed (e.g., safety inspection), this
could provide the taxing authority with a means of discovering unreported boat
ownership.
13. (LO 2, 8)
a. Economic justification. The tax law addresses concerns about the use of fossil
fuels—in terms of both reliance on foreign oil and the need to ease the problem of
climate change.
b. Economic justification. The tax law addresses concerns about the use of fossil
fuels—in terms of both reliance on foreign oil and the need to ease the problem of
climate change.
c. Economic justification. Research and development activities are encouraged by
allowing immediate or faster write-off of these expenditures.
d. Social justification. The charitable deduction helps fund private organizations and
causes that are operated in the interest of the general welfare. This relieves
government of the need for considerable public funding.
e. Economic justification. Known as the S election, the provision encourages small
businesses to operate in the corporate form without suffering all of the tax
disadvantages of the regular (C) corporation.
14. (LO 4, 8)
a. Social considerations explain the credit. It is socially desirable to encourage
parents to provide care for their children while they work.
b. These deductions raise the issue of preferential tax treatment for homeowners—
taxpayers who rent their personal residences do not receive comparable treatment.
Even so, the encouragement of home ownership can be justified on economic and
social grounds.
c. The joint return procedure came about to equalize the position of married persons
living in common law states with those residing in community property
jurisdictions. Political and equity considerations caused this result.
d. Activities deemed contrary to public policy should not result in tax savings.
e. The NOL carryforward provision is an equity consideration designed to mitigate the
effect of the annual accounting period concept.
f. The installment method of reporting gain is consistent with the wherewithal to pay
concept—the seller is taxed when the payments are made by the purchaser.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 5
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
g. The exclusion from Federal income taxation of interest from state and local bonds
can be justified largely on political considerations. Political goodwill is generated by
allowing state and local jurisdictions to secure financing at a lower cost (i.e.,
interest rate) due to favorable Federal income tax treatment.
h. The treatment of prepaid income is justified under the wherewithal to pay
concept. It also eases the task of the IRS as to administration of the tax law.
15. (LO 3) (See Digging Deeper 3.) A value added tax (VAT) taxes the increment in value as
goods move through the production and manufacturing stages to the marketplace.
Although the tax is paid by the producer, it is reflected in the selling price of the
goods. Therefore, a VAT is a tax on consumption.
A national sales tax taxes numerous transactions and is collected on the final sale of
goods and services to the consumer. Consequently, it is collected from the consumer
and not the producer of the product as does a VAT.
In terms of taxpayer compliance, a VAT is preferable to a national sales tax. Without
significant collection efforts, a national sales tax could easily be circumvented or
avoided in many ways (e.g., resorting to a barter system of doing business).
16. (LO 3) If the tax is imposed on the right to pass property at death, it is classified
as an estate tax. If it taxes the right to receive property from a decedent, it is
termed an inheritance tax.
a. Some states impose both an estate tax and an inheritance tax. Some states
(e.g., Florida and Texas) levy neither tax.
b. The Federal government imposes an estate tax.
17. (LO 2, 8) Students’ e-mails may vary. Build interaction into the exercise wherever
possible, asking the student to send and receive e-mail in a professional and
responsible manner.
18. (LO 2, 8)
a. $24,663 {[($131,750 − $100,525) × 24%] + $17,168.50}.
b. 10%, 12%, 22%, 24%.
c. 24%.
d. 18.7% ($24,663 ÷ $131,750).
e. 16.9% ($24,663 ÷ $146,350).
19. (LO 3, 4, 6) If Mike is drafted by a team in one of the listed states, he will escape state
income tax on income earned within that state (e.g., training camp, home games). He
will not, however, escape the income tax (state and local) imposed by jurisdictions
where he plays away games. Called the “jock tax,” it is applied to out-of-state athletes
and entertainers.
20. (LO 2, 8) The checkoff boxes add complexity to the return and mislead taxpayers into
presuming that they are not paying for the donation.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 6
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
21. (LO 7) The SSTSs are available at: aicpa-cima.com/resources/download/revised-
statements-on-standards-for-tax-services-no-1-4-1-1-2024.
a. While it is fine and usually beneficial to use tax preparation software, the preparer
should be sure they understand how the software works and verify at least a
sampling of items on returns and review all returns for completeness and
accuracy. For a new tax calculation such as the renter’s credit, the preparer should
be sure they understand how the credit is computed and then apply the provision
to a variety of fact patterns (e.g., single taxpayers versus married taxpayers)
without tax software and compare it to the software’s calculation of the credit to
ensure that the software is computing the credit correctly.
b. As noted in SSTS 1.4, members are responsible for their work product and should
take “reasonable steps” to be sure any tools they use “are appropriate for the
intended purpose.” A preparer should not rely on artificial intelligence (AI) to
produce a tax answer for a client. If appropriate in terms of security and privacy, AI
can be used, similar to conducting research, but as with any other research tool or
resource, the preparer must still fully analyze and review the results for accuracy,
completeness, and whether current tax law is appropriately applied.
BRIDGE DISCIPLINE PROBLEMS
1. Solutions may vary among students.
2. Solutions may vary among students.
3. Solutions may vary among students.
4. When taxes become “too high,” the rate of tax cheating increases, because the payoff
from misconduct increases. Property and transaction taxes are difficult to cheat on,
as the tax base is easily detectible, while cheating on taxes on income and asset
transfers may be more easily accomplished, and enforcement activities by the taxing
agency become more expensive. High rates of tax cheating can lead to several
undesirable consequences.
• A “conspicuous consumption” society, wherein taxpayers use their tax
underpayments to increase their lifestyles in a public fashion.
• A loss of confidence in the self-assessment system, such that certain levels of
cheating are assumed to occur, and the number of cheaters increases.
• The “missing revenue” keeps the government from delivering the goods and
services that the taxes are supposed to pay for.
• Political gridlock can occur when it becomes impossible to raise tax rates high
enough, or broaden the tax base enough, to offset the cheaters’ “missing revenue.”
5. a. To encourage pension plans is to stimulate saving (economic consideration). Also, it
provides security from the private sector for retirement to supplement public
programs which tend to provide lesser benefits (social considerations). An opposing
consideration is that only higher income individuals are able to fully fund their
pension plans and thus gain the greater tax benefit from the favorable rules for
retirement savings.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 7
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
b. To make education more widely available is to promote a socially desirable
objective. A better educated workforce also serves to improve the country’s
economic capabilities. As a result, education tax incentives can be justified on both
social and economic grounds. A weakness in the current incentives is that they are
only for college education, rather than also in preparation for other careers
including health care, personal care, construction, and skilled trades (e.g.,
mechanics, electricians, and plumbers).
c. The encouragement of home ownership can be justified on both social and
economic grounds. For example, if a person owns a home and has no mortgage by
the time they retire, their monthly living expenses will be lower. An opposing
consideration to the tax breaks for home ownership is that the mortgage interest
deduction applies to debt up to $750,000, thus providing a greater tax break to
higher income individuals who can qualify for this large of a mortgage. Also, renters
indirectly pay property taxes through their rent, but receive no tax deduction for
that indirect payment. Finally, the home ownership tax breaks today apply once
the home is acquired; there are no tax incentives to help an individual buy a home
(such as a first-time homebuyer tax credit).
RESEARCH PROBLEMS
These research problems require that students utilize online resources to research and answer
the questions. As a result, solutions may vary among students and courses. You should
determine the skill and experience levels of the students before assigning these problems,
coaching where necessary. Encourage students to use reliable websites and blogs of the IRS
and other government agencies, media outlets, businesses, tax professionals, academics, think
tanks, and political outlets to research their answers.
1. An example of a sweetened beverage tax proposal is H.R. 2772 (117th Congress), the
SWEET Act. Proposals also exist in a number of states and cities. Some cities,
including Berkeley, California, Philadelphia, Pennsylvania, and Boulder, Colorado, have
already enacted soda taxes. Considerations in analyzing these proposals include issues
of regressivity (an equity and fairness issue), complexity of definitions, burden of
enforcement, and neutrality in affecting decision making. Cook County, Illinois
(Chicago) passed and then repealed a sweetened beverage tax due to a number of
these issues.
2. Each of the Big Four firms has information on data analytics and how it can be used
for tax purposes:
• pwc.com/us/en/services/consulting/cloud-digital/data-analytics.html
• home.kpmg.com/xx/en/home/services/tax/global-indirect-tax/data-and-
analytics.html
• ey.com/en_us/big-data-analytics
• www2.deloitte.com/us/en/pages/deloitte-analytics/solutions/deloitte-
analytics.html
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 8
website, in whole or in part.
Taxation 2025 Essentials of Taxation Individuals
and Business Entities 28th Edition by Annette
Nellen
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
Solution and Answer Guide
NELLEN, CUCCIA, PERSELLIN, YOUNG, SWFT ESSENTIALS OF TAXATION: INDIVIDUALS AND
BUSINESS ENTITIES 2025, 9780357989197; CHAPTER 1: INTRODUCTION TO TAXATION
TABLE OF CONTENTS
Problems ..............................................................................................................................1
Bridge Discipline Problems ................................................................................................ 7
Research Problems ............................................................................................................. 8
Solutions To Becker CPA Review Questions ..................................................................... 9
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 in Appendix D, using chapter features (e.g., Global Tax
Issues, Ethics & Equity, Tax Planning, and Digging Deeper), examining the tax forms
used 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, 5, 6) 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 if you relocate?
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 1
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
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 sales and excise 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 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.
5. (LO 1, 2, 6) (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.
6. (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. See the discussion in connection with Example 4
in the textbook.
7. (LO 3) Although the Baker Motors bid is the lowest from a long-term financial
standpoint, it is 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 tax. This
would hardly be the case with a car dealership. In fact, commercial properties (e.g., car
dealerships) often are subject to higher tax rates.
8. (LO 3) A possible explanation is that Sophia made capital improvements (e.g., added a
swimming pool) to her residence and her parents became retirees (e.g., reached age 65).
9. (LO 5, 6) SWFT, LLP
5191 Natorp Boulevard
Mason, OH 45040
December 5, 2024
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.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 2
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
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
10. (LO 5, 6)
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 1 5,000
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
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
Year 1 Year 2 Year 3
Ashley’s After-Tax Cash Flow
Dividend received $10 5,050 $21 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 $148,521 $255,534
Total present value $483,784
*Present value factors (.8929, .7972, .7118) from Appendix E.
b. Year 1 Year 2 Year 3
Individual 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
Individual tax liability** $ 23,750 $ 60,500 $1 1 6,2 50
**Rate = 25%
Ashley’s After-Tax Cash Flow
Sales revenue $1 50 ,000 $320,000 $600,000
Tax-free interest income 5,000 8,000 1 5,000
Cash expenses (30,000) (58,000) (95,000)
Individual tax liability (23,750) (60,500) (116,250)
After-tax cash flow $1 0 1 ,250 $209,500 $403,750
PV of cash flow* $ 90,406 $16 7,0 1 3 $287,389
Total present value $544,808
*Present value factors (.8929, .7972, .7118) from Appendix E.
c. If Ashley wants to have access to all available cash from the business, then she
will have to pay out dividends annually. As seen in the answers to parts a. and b.
above, the present value of future cash flows is substantially greater if she does
not incorporate under this assumption. Alternatively, if she does not need to pay
out dividends, then she may be better off by incorporating, since only the
corporate tax will be incurred, which is less than her individual tax. The value of
her stock will increase and she then can sell the stock at a later date at favorable
capital gains rates.
11. (LO 1) PowerPoint presentations will vary. In favor of high progressivity:
• Ability to pay.
• Fairness of result.
• Benefits of government skew toward those at upper-income levels.
Contrary to high progressivity:
• Discouragement of work and innovation.
• Unfairness of result.
• Civic engagement by those at lower-income levels requires “skin in the game.”
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
12. (LO 3)
a. In terms of taxpayer compliance, an ad valorem tax on personalty is less desirable
than one on realty. However, a tax on business personalty, such as inventory, is to
be preferred over one on personal use (i.e., nonbusiness) personalty.
b. A tax on stock and bonds would be too easily avoided. The taxing authority would
have no means of ascertaining ownership of these assets.
c. Poor taxpayer compliance is to be expected for any tax on personal use personalty.
However, if boats had to be periodically licensed (e.g., safety inspection), this
could provide the taxing authority with a means of discovering unreported boat
ownership.
13. (LO 2, 8)
a. Economic justification. The tax law addresses concerns about the use of fossil
fuels—in terms of both reliance on foreign oil and the need to ease the problem of
climate change.
b. Economic justification. The tax law addresses concerns about the use of fossil
fuels—in terms of both reliance on foreign oil and the need to ease the problem of
climate change.
c. Economic justification. Research and development activities are encouraged by
allowing immediate or faster write-off of these expenditures.
d. Social justification. The charitable deduction helps fund private organizations and
causes that are operated in the interest of the general welfare. This relieves
government of the need for considerable public funding.
e. Economic justification. Known as the S election, the provision encourages small
businesses to operate in the corporate form without suffering all of the tax
disadvantages of the regular (C) corporation.
14. (LO 4, 8)
a. Social considerations explain the credit. It is socially desirable to encourage
parents to provide care for their children while they work.
b. These deductions raise the issue of preferential tax treatment for homeowners—
taxpayers who rent their personal residences do not receive comparable treatment.
Even so, the encouragement of home ownership can be justified on economic and
social grounds.
c. The joint return procedure came about to equalize the position of married persons
living in common law states with those residing in community property
jurisdictions. Political and equity considerations caused this result.
d. Activities deemed contrary to public policy should not result in tax savings.
e. The NOL carryforward provision is an equity consideration designed to mitigate the
effect of the annual accounting period concept.
f. The installment method of reporting gain is consistent with the wherewithal to pay
concept—the seller is taxed when the payments are made by the purchaser.
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
g. The exclusion from Federal income taxation of interest from state and local bonds
can be justified largely on political considerations. Political goodwill is generated by
allowing state and local jurisdictions to secure financing at a lower cost (i.e.,
interest rate) due to favorable Federal income tax treatment.
h. The treatment of prepaid income is justified under the wherewithal to pay
concept. It also eases the task of the IRS as to administration of the tax law.
15. (LO 3) (See Digging Deeper 3.) A value added tax (VAT) taxes the increment in value as
goods move through the production and manufacturing stages to the marketplace.
Although the tax is paid by the producer, it is reflected in the selling price of the
goods. Therefore, a VAT is a tax on consumption.
A national sales tax taxes numerous transactions and is collected on the final sale of
goods and services to the consumer. Consequently, it is collected from the consumer
and not the producer of the product as does a VAT.
In terms of taxpayer compliance, a VAT is preferable to a national sales tax. Without
significant collection efforts, a national sales tax could easily be circumvented or
avoided in many ways (e.g., resorting to a barter system of doing business).
16. (LO 3) If the tax is imposed on the right to pass property at death, it is classified
as an estate tax. If it taxes the right to receive property from a decedent, it is
termed an inheritance tax.
a. Some states impose both an estate tax and an inheritance tax. Some states
(e.g., Florida and Texas) levy neither tax.
b. The Federal government imposes an estate tax.
17. (LO 2, 8) Students’ e-mails may vary. Build interaction into the exercise wherever
possible, asking the student to send and receive e-mail in a professional and
responsible manner.
18. (LO 2, 8)
a. $24,663 {[($131,750 − $100,525) × 24%] + $17,168.50}.
b. 10%, 12%, 22%, 24%.
c. 24%.
d. 18.7% ($24,663 ÷ $131,750).
e. 16.9% ($24,663 ÷ $146,350).
19. (LO 3, 4, 6) If Mike is drafted by a team in one of the listed states, he will escape state
income tax on income earned within that state (e.g., training camp, home games). He
will not, however, escape the income tax (state and local) imposed by jurisdictions
where he plays away games. Called the “jock tax,” it is applied to out-of-state athletes
and entertainers.
20. (LO 2, 8) The checkoff boxes add complexity to the return and mislead taxpayers into
presuming that they are not paying for the donation.
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website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
21. (LO 7) The SSTSs are available at: aicpa-cima.com/resources/download/revised-
statements-on-standards-for-tax-services-no-1-4-1-1-2024.
a. While it is fine and usually beneficial to use tax preparation software, the preparer
should be sure they understand how the software works and verify at least a
sampling of items on returns and review all returns for completeness and
accuracy. For a new tax calculation such as the renter’s credit, the preparer should
be sure they understand how the credit is computed and then apply the provision
to a variety of fact patterns (e.g., single taxpayers versus married taxpayers)
without tax software and compare it to the software’s calculation of the credit to
ensure that the software is computing the credit correctly.
b. As noted in SSTS 1.4, members are responsible for their work product and should
take “reasonable steps” to be sure any tools they use “are appropriate for the
intended purpose.” A preparer should not rely on artificial intelligence (AI) to
produce a tax answer for a client. If appropriate in terms of security and privacy, AI
can be used, similar to conducting research, but as with any other research tool or
resource, the preparer must still fully analyze and review the results for accuracy,
completeness, and whether current tax law is appropriately applied.
BRIDGE DISCIPLINE PROBLEMS
1. Solutions may vary among students.
2. Solutions may vary among students.
3. Solutions may vary among students.
4. When taxes become “too high,” the rate of tax cheating increases, because the payoff
from misconduct increases. Property and transaction taxes are difficult to cheat on,
as the tax base is easily detectible, while cheating on taxes on income and asset
transfers may be more easily accomplished, and enforcement activities by the taxing
agency become more expensive. High rates of tax cheating can lead to several
undesirable consequences.
• A “conspicuous consumption” society, wherein taxpayers use their tax
underpayments to increase their lifestyles in a public fashion.
• A loss of confidence in the self-assessment system, such that certain levels of
cheating are assumed to occur, and the number of cheaters increases.
• The “missing revenue” keeps the government from delivering the goods and
services that the taxes are supposed to pay for.
• Political gridlock can occur when it becomes impossible to raise tax rates high
enough, or broaden the tax base enough, to offset the cheaters’ “missing revenue.”
5. a. To encourage pension plans is to stimulate saving (economic consideration). Also, it
provides security from the private sector for retirement to supplement public
programs which tend to provide lesser benefits (social considerations). An opposing
consideration is that only higher income individuals are able to fully fund their
pension plans and thus gain the greater tax benefit from the favorable rules for
retirement savings.
© 2025 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible 7
website, in whole or in part.
, Solution and Answer Guide: Nellen, Cuccia, Persellin, Young, SWFT Essentials of Taxation: Individuals and Business
Entities 2025, 9780357989197; Chapter 1: Introduction to Taxation
b. To make education more widely available is to promote a socially desirable
objective. A better educated workforce also serves to improve the country’s
economic capabilities. As a result, education tax incentives can be justified on both
social and economic grounds. A weakness in the current incentives is that they are
only for college education, rather than also in preparation for other careers
including health care, personal care, construction, and skilled trades (e.g.,
mechanics, electricians, and plumbers).
c. The encouragement of home ownership can be justified on both social and
economic grounds. For example, if a person owns a home and has no mortgage by
the time they retire, their monthly living expenses will be lower. An opposing
consideration to the tax breaks for home ownership is that the mortgage interest
deduction applies to debt up to $750,000, thus providing a greater tax break to
higher income individuals who can qualify for this large of a mortgage. Also, renters
indirectly pay property taxes through their rent, but receive no tax deduction for
that indirect payment. Finally, the home ownership tax breaks today apply once
the home is acquired; there are no tax incentives to help an individual buy a home
(such as a first-time homebuyer tax credit).
RESEARCH PROBLEMS
These research problems require that students utilize online resources to research and answer
the questions. As a result, solutions may vary among students and courses. You should
determine the skill and experience levels of the students before assigning these problems,
coaching where necessary. Encourage students to use reliable websites and blogs of the IRS
and other government agencies, media outlets, businesses, tax professionals, academics, think
tanks, and political outlets to research their answers.
1. An example of a sweetened beverage tax proposal is H.R. 2772 (117th Congress), the
SWEET Act. Proposals also exist in a number of states and cities. Some cities,
including Berkeley, California, Philadelphia, Pennsylvania, and Boulder, Colorado, have
already enacted soda taxes. Considerations in analyzing these proposals include issues
of regressivity (an equity and fairness issue), complexity of definitions, burden of
enforcement, and neutrality in affecting decision making. Cook County, Illinois
(Chicago) passed and then repealed a sweetened beverage tax due to a number of
these issues.
2. Each of the Big Four firms has information on data analytics and how it can be used
for tax purposes:
• pwc.com/us/en/services/consulting/cloud-digital/data-analytics.html
• home.kpmg.com/xx/en/home/services/tax/global-indirect-tax/data-and-
analytics.html
• ey.com/en_us/big-data-analytics
• www2.deloitte.com/us/en/pages/deloitte-analytics/solutions/deloitte-
analytics.html
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