, SOLUTION MANUAL FOR Fundamentals of
Taxation for Individuals and Business Entities A
Practical Approach, 2026 Edition Gregory A. Carnes
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:
, Chapter 1—The Professional Practice of Taxation
End-of-Chapter Solutions
Discussion Questions
1. Describe the goal of tax planning.
Title: Discussion Question 1
Difficulty: Easy
Learning Objective 1: 1.1
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.1
Solution: The goal of tax planning is to maximize after-tax income. After-tax income is net
income after reducing revenue for all expenses including federal income taxes. Tax planning
should consider tax factors as well as non-tax factors.
Time On Task: 2 minutes
2. What is the formula to calculate an individual’s taxable income?
Title: Discussion Question 2
Difficulty: Easy
Learning Objective 1: 1.2
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.2
Solution: The formula to calculate an individual’s taxable income is as follows:
Gross income
Less: Deductions for adjusted gross income
Adjusted gross income
Less: Greater of standard deduction or itemized deductions
Less: Qualified business income deduction
Taxable income
Time On Task: 2 minutes
3. What form(s) is (are) used to file an individual’s income tax return?
Title: Discussion Question 3
Difficulty: Easy
Learning Objective 1: 1.2
1-1
,Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.2
Solution: Form 1040 is used to file an individual’s income tax return information. Form 1040-SR
can be used by those 65 and older.
Time On Task: 1 minute
4. Explain why a taxpayer with higher income does not have as large of a behavioral response to
an increase in the tax rate as a lower-income taxpayer.
Title: Discussion Question 4
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: A lower-income taxpayer needs every after-tax dollar earned to pay bills and does not
have much discretionary income. If the income tax rate increases, the lower-income taxpayer
may have to work more hours at their current job or take on another job to have the same amount
of after-tax income. A wealthier taxpayer may view the increased tax rate adversely but has more
flexibility with their discretionary income. The wealthier taxpayer may view their leisure time as
more important than working extra hours to earn the same after-tax pay.
Time On Task: 4 minutes
5. Differentiate between tax compliance and tax planning.
Title: Discussion Question 5
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: Tax planning is the process of estimating an individual’s tax liability for multiple
scenarios and/or multiple years and considering ways to reduce it. The appropriate goal for tax
planning is to maximize after-tax income. After-tax income is net income after reducing revenue
for all expenses including federal income taxes. Tax compliance is determining the tax effects
for transactions that have already occurred, including the preparation of tax returns.
Time On Task: 4 minutes
6. Differentiate between an open transaction and a closed transaction.
1-2
,Title: Discussion Question 6
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: An open transaction means that the proposed transaction is not yet completed. A closed
transaction means that the relevant events have already happened, and the facts are set. This
distinction is important because in an open transaction, the facts and results can be changed to
achieve a better outcome. A closed transaction does not allow for this.
Time On Task: 3 minutes
7. What is the marginal tax rate? The average tax rate? The effective tax rate?
Title: Discussion Question 7
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: The marginal tax rate is the rate that applies to the next additional dollar earned. The
average tax rate is total income tax divided by taxable income. The effective tax rate is total
income tax divided by total income.
Time On Task: 3 minutes
8. Explain why a taxpayer would want to delay receipt of income or accelerate expenses into the
current year.
Title: Discussion Question 8
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: If a taxpayer is in a higher tax bracket in the current year and expects to be in a lower
tax bracket next year, he would have tax savings from delaying the receipt of income to next
year. If the current year’s tax rate is higher, he would receive more tax benefit from accelerating
deductible expenses into the current year rather than waiting until the next year when the
marginal tax rate would be less.
Time On Task: 4 minutes
1-3
,9. In what circumstances would it be better to accelerate income into the current year?
Title: Discussion Question 9
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: It would be better to accelerate income into the current year if the taxpayer’s current
income tax rate is less than it will be in future years.
Time On Task: 2 minutes
10. Name three tax planning opportunities that taxpayers need to be familiar with.
Title: Discussion Question 10
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: Three of the following tax planning opportunities are:
rates vary across different time periods
rates vary across different jurisdictions
rates vary across different types of income, and
rates vary across different types of taxpayers.
Time On Task: 3 minutes
11. Discuss why the jurisdiction of a business might affect its after-tax cash flow.
Title: Discussion Question 11
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: Tax rates may vary across different jurisdictions. This will result in more or less after-
tax cash flow. The revenue generated may be the same, but the after-tax cash flow could be
substantially different.
Time On Task: 3 minutes
1-4
,12. Why is it important to identify the type of income earned or losses incurred?
Title: Discussion Question 12
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: It is important to identify the character of the income earned because it is possible that
different rates apply across the income types. Also, some character types may limit the amount
of deduction allowed. Individuals currently pay tax at either 0%, 15%, or 20% on long-term
capital gains and qualified dividend income. Interest income earned from a municipal bond is
tax-exempt. And, for individuals, the maximum deduction per year for net capital losses is
$3,000 per year. All these examples demonstrate the importance of the character of the income
or loss.
Time On Task: 5 minutes
13. Which entity, an individual or a corporation, would pay more income tax on a net long-term
capital gain of $10,000?
Title: Discussion Question 13
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: A corporation will pay more tax on a net long-term capital gain than an individual. A
corporation is a separate legal entity and pays tax at a flat 21%. An individual pays tax on long-
term capital gains at a preferential rate of 0%, 15%, or 20%, depending on their filing status and
income level.
Time On Task: 4 minutes
14. Explain static versus dynamic forecasting.
Title: Discussion Question 14
Difficulty: Hard
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
1-5
,Section Reference 1: 1.3
Solution: Tax = Rate Base. Static forecasting assumes that the rate and base are independent
of one another. Therefore, the tax base would not be affected by a change in the tax rate.
Dynamic forecasting assumes there is a relationship (cause and effect) between the two
variables. If the tax rate were to increase, it might not necessarily result in the desired outcome.
For example, an increase in the gasoline tax might make a taxpayer reconsider their travel plans
and take a vacation closer to home because the cost of gas has increased.
Time On Task: 6 minutes
15. Discuss the phrase “A dollar earned today is worth more than a dollar earned in the future.”
Title: Discussion Question 15
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: The time value of money results in a dollar received today being worth more than a
dollar received later due to the effect that interest rates have on potential buying capacity. The
value of a dollar changes over time because of interest rates. During an inflationary period, a
dollar received in the future will not buy as much goods as the same dollar received today. Also,
a dollar invested today will generate more interest than the same dollar invested at a later date.
Time On Task: 4 minutes
16. Which term describes a legal method of reducing taxes?
Title: Discussion Question 16
Difficulty: Medium
Learning Objective 1: 1.4
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.4
Solution: Tax avoidance describes a legal method of reducing taxes. The tax law provides tax
planning opportunities, and a taxpayer is not expected to pay more than the amount required by
law. Tax evasion means reducing taxes illegally.
Time On Task: 3 minutes
17. Why must a CPA be ethical when providing professional tax advice to others?
Title: Discussion Question 17
Difficulty: Medium
1-6
,Learning Objective 1: 1.4
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.4
Solution: All professions have a code of conduct so that the general public knows that the
individuals in that profession can be trusted. CPAs who engage in unethical conduct may be
disciplined by the AICPA.
Time On Task: 3 minutes
18. Why are there two different sets of rules to govern the preparation of financial statements and
the preparation of tax returns?
Title: Discussion Question 18
Difficulty: Medium
Learning Objective 1: 1.5
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.5
Solution: There are two sets of rules because each set serves a particular role and purpose.
GAAP ensures that the financial statements are prepared fairly, accurately, and consistently
across different business industries. Investors and creditors need to know that they can rely on
the financial statements in making a sound investment decision. Congress creates tax laws to
raise revenue and to meet other economic, social, and political objectives. For example, if a
business has a lawsuit pending against it, a disclosure should be made on the financial statement,
so an investor is aware of it before purchasing the company’s stock. On the other hand, Congress
will not allow a business to deduct the cost of a legal judgment while it is still pending and
unclear as to its outcome.
Time On Task: 4 minutes
19. Provide an example of a social objective of the tax law.
Title: Discussion Question 19
Difficulty: Easy
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: Student answers will vary. One example of a social objective being met by a tax law is
when an employer provides an employee benefit such as health insurance or a 401(k) plan for the
benefit of the employees. There may be little direct business purpose for an employer to provide
these benefits and they are costly, but it is socially desirable to encourage this behavior. By
1-7
, allowing a deduction for these expenses Congress reduces the cost of providing these to the
employee. There are numerous correct answers including an employer providing disability
insurance, reimbursement for adoption expenses, or reimbursement for education by the
employee.
Time On Task: 3 minutes
20. Provide an example of an economic objective of the tax law.
Title: Discussion Question 20
Difficulty: Easy
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: An example of an economic objective being met by a tax law is Section 179 and bonus
depreciation. The IRC allows businesses to immediately deduct the cost of purchasing qualified
assets that normally would be capitalized and written off over the asset’s useful life. Allowing
businesses to take an immediate deduction results in large tax savings for the business and is
intended to stimulate the economy. Another example is the preferential tax rate on long-term
capital gains and qualified dividend income.
Time On Task: 3 minutes
21. Describe horizontal equity and vertical equity.
Title: Discussion Question 21
Difficulty: Medium
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: Horizontal equity provides that taxpayers in similar situations should pay similar
amounts of tax. Significant factors can affect the ability to pay such as marital status, dependents,
and health. Vertical equity provides that taxpayers with a greater ability to pay contribute more
in taxes than taxpayers with less ability to pay. Vertical equity focuses on a fair rate structure to
calculate the tax liability.
Time On Task: 4 minutes
22. Name three other types of taxes besides the income tax that an individual may have to pay.
Title: Discussion Question 22
Difficulty: Easy
1-8
Taxation for Individuals and Business Entities A
Practical Approach, 2026 Edition Gregory A. Carnes
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:
, Chapter 1—The Professional Practice of Taxation
End-of-Chapter Solutions
Discussion Questions
1. Describe the goal of tax planning.
Title: Discussion Question 1
Difficulty: Easy
Learning Objective 1: 1.1
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.1
Solution: The goal of tax planning is to maximize after-tax income. After-tax income is net
income after reducing revenue for all expenses including federal income taxes. Tax planning
should consider tax factors as well as non-tax factors.
Time On Task: 2 minutes
2. What is the formula to calculate an individual’s taxable income?
Title: Discussion Question 2
Difficulty: Easy
Learning Objective 1: 1.2
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.2
Solution: The formula to calculate an individual’s taxable income is as follows:
Gross income
Less: Deductions for adjusted gross income
Adjusted gross income
Less: Greater of standard deduction or itemized deductions
Less: Qualified business income deduction
Taxable income
Time On Task: 2 minutes
3. What form(s) is (are) used to file an individual’s income tax return?
Title: Discussion Question 3
Difficulty: Easy
Learning Objective 1: 1.2
1-1
,Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.2
Solution: Form 1040 is used to file an individual’s income tax return information. Form 1040-SR
can be used by those 65 and older.
Time On Task: 1 minute
4. Explain why a taxpayer with higher income does not have as large of a behavioral response to
an increase in the tax rate as a lower-income taxpayer.
Title: Discussion Question 4
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: A lower-income taxpayer needs every after-tax dollar earned to pay bills and does not
have much discretionary income. If the income tax rate increases, the lower-income taxpayer
may have to work more hours at their current job or take on another job to have the same amount
of after-tax income. A wealthier taxpayer may view the increased tax rate adversely but has more
flexibility with their discretionary income. The wealthier taxpayer may view their leisure time as
more important than working extra hours to earn the same after-tax pay.
Time On Task: 4 minutes
5. Differentiate between tax compliance and tax planning.
Title: Discussion Question 5
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: Tax planning is the process of estimating an individual’s tax liability for multiple
scenarios and/or multiple years and considering ways to reduce it. The appropriate goal for tax
planning is to maximize after-tax income. After-tax income is net income after reducing revenue
for all expenses including federal income taxes. Tax compliance is determining the tax effects
for transactions that have already occurred, including the preparation of tax returns.
Time On Task: 4 minutes
6. Differentiate between an open transaction and a closed transaction.
1-2
,Title: Discussion Question 6
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: An open transaction means that the proposed transaction is not yet completed. A closed
transaction means that the relevant events have already happened, and the facts are set. This
distinction is important because in an open transaction, the facts and results can be changed to
achieve a better outcome. A closed transaction does not allow for this.
Time On Task: 3 minutes
7. What is the marginal tax rate? The average tax rate? The effective tax rate?
Title: Discussion Question 7
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: The marginal tax rate is the rate that applies to the next additional dollar earned. The
average tax rate is total income tax divided by taxable income. The effective tax rate is total
income tax divided by total income.
Time On Task: 3 minutes
8. Explain why a taxpayer would want to delay receipt of income or accelerate expenses into the
current year.
Title: Discussion Question 8
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: If a taxpayer is in a higher tax bracket in the current year and expects to be in a lower
tax bracket next year, he would have tax savings from delaying the receipt of income to next
year. If the current year’s tax rate is higher, he would receive more tax benefit from accelerating
deductible expenses into the current year rather than waiting until the next year when the
marginal tax rate would be less.
Time On Task: 4 minutes
1-3
,9. In what circumstances would it be better to accelerate income into the current year?
Title: Discussion Question 9
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: It would be better to accelerate income into the current year if the taxpayer’s current
income tax rate is less than it will be in future years.
Time On Task: 2 minutes
10. Name three tax planning opportunities that taxpayers need to be familiar with.
Title: Discussion Question 10
Difficulty: Easy
Learning Objective 1: 1.3
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.3
Solution: Three of the following tax planning opportunities are:
rates vary across different time periods
rates vary across different jurisdictions
rates vary across different types of income, and
rates vary across different types of taxpayers.
Time On Task: 3 minutes
11. Discuss why the jurisdiction of a business might affect its after-tax cash flow.
Title: Discussion Question 11
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: Tax rates may vary across different jurisdictions. This will result in more or less after-
tax cash flow. The revenue generated may be the same, but the after-tax cash flow could be
substantially different.
Time On Task: 3 minutes
1-4
,12. Why is it important to identify the type of income earned or losses incurred?
Title: Discussion Question 12
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: It is important to identify the character of the income earned because it is possible that
different rates apply across the income types. Also, some character types may limit the amount
of deduction allowed. Individuals currently pay tax at either 0%, 15%, or 20% on long-term
capital gains and qualified dividend income. Interest income earned from a municipal bond is
tax-exempt. And, for individuals, the maximum deduction per year for net capital losses is
$3,000 per year. All these examples demonstrate the importance of the character of the income
or loss.
Time On Task: 5 minutes
13. Which entity, an individual or a corporation, would pay more income tax on a net long-term
capital gain of $10,000?
Title: Discussion Question 13
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: A corporation will pay more tax on a net long-term capital gain than an individual. A
corporation is a separate legal entity and pays tax at a flat 21%. An individual pays tax on long-
term capital gains at a preferential rate of 0%, 15%, or 20%, depending on their filing status and
income level.
Time On Task: 4 minutes
14. Explain static versus dynamic forecasting.
Title: Discussion Question 14
Difficulty: Hard
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
1-5
,Section Reference 1: 1.3
Solution: Tax = Rate Base. Static forecasting assumes that the rate and base are independent
of one another. Therefore, the tax base would not be affected by a change in the tax rate.
Dynamic forecasting assumes there is a relationship (cause and effect) between the two
variables. If the tax rate were to increase, it might not necessarily result in the desired outcome.
For example, an increase in the gasoline tax might make a taxpayer reconsider their travel plans
and take a vacation closer to home because the cost of gas has increased.
Time On Task: 6 minutes
15. Discuss the phrase “A dollar earned today is worth more than a dollar earned in the future.”
Title: Discussion Question 15
Difficulty: Medium
Learning Objective 1: 1.3
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.3
Solution: The time value of money results in a dollar received today being worth more than a
dollar received later due to the effect that interest rates have on potential buying capacity. The
value of a dollar changes over time because of interest rates. During an inflationary period, a
dollar received in the future will not buy as much goods as the same dollar received today. Also,
a dollar invested today will generate more interest than the same dollar invested at a later date.
Time On Task: 4 minutes
16. Which term describes a legal method of reducing taxes?
Title: Discussion Question 16
Difficulty: Medium
Learning Objective 1: 1.4
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.4
Solution: Tax avoidance describes a legal method of reducing taxes. The tax law provides tax
planning opportunities, and a taxpayer is not expected to pay more than the amount required by
law. Tax evasion means reducing taxes illegally.
Time On Task: 3 minutes
17. Why must a CPA be ethical when providing professional tax advice to others?
Title: Discussion Question 17
Difficulty: Medium
1-6
,Learning Objective 1: 1.4
Standard 1: AACSB || Analytic
Standard 2: AICPA || AC: Measurement Analysis and Interpretation
Standard 3: Bloom's || Application
Section Reference 1: 1.4
Solution: All professions have a code of conduct so that the general public knows that the
individuals in that profession can be trusted. CPAs who engage in unethical conduct may be
disciplined by the AICPA.
Time On Task: 3 minutes
18. Why are there two different sets of rules to govern the preparation of financial statements and
the preparation of tax returns?
Title: Discussion Question 18
Difficulty: Medium
Learning Objective 1: 1.5
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.5
Solution: There are two sets of rules because each set serves a particular role and purpose.
GAAP ensures that the financial statements are prepared fairly, accurately, and consistently
across different business industries. Investors and creditors need to know that they can rely on
the financial statements in making a sound investment decision. Congress creates tax laws to
raise revenue and to meet other economic, social, and political objectives. For example, if a
business has a lawsuit pending against it, a disclosure should be made on the financial statement,
so an investor is aware of it before purchasing the company’s stock. On the other hand, Congress
will not allow a business to deduct the cost of a legal judgment while it is still pending and
unclear as to its outcome.
Time On Task: 4 minutes
19. Provide an example of a social objective of the tax law.
Title: Discussion Question 19
Difficulty: Easy
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: Student answers will vary. One example of a social objective being met by a tax law is
when an employer provides an employee benefit such as health insurance or a 401(k) plan for the
benefit of the employees. There may be little direct business purpose for an employer to provide
these benefits and they are costly, but it is socially desirable to encourage this behavior. By
1-7
, allowing a deduction for these expenses Congress reduces the cost of providing these to the
employee. There are numerous correct answers including an employer providing disability
insurance, reimbursement for adoption expenses, or reimbursement for education by the
employee.
Time On Task: 3 minutes
20. Provide an example of an economic objective of the tax law.
Title: Discussion Question 20
Difficulty: Easy
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: An example of an economic objective being met by a tax law is Section 179 and bonus
depreciation. The IRC allows businesses to immediately deduct the cost of purchasing qualified
assets that normally would be capitalized and written off over the asset’s useful life. Allowing
businesses to take an immediate deduction results in large tax savings for the business and is
intended to stimulate the economy. Another example is the preferential tax rate on long-term
capital gains and qualified dividend income.
Time On Task: 3 minutes
21. Describe horizontal equity and vertical equity.
Title: Discussion Question 21
Difficulty: Medium
Learning Objective 1: 1.6
Standard 1: AACSB || Knowledge
Standard 2: AICPA || AC: Reporting
Standard 3: Bloom's || Knowledge
Section Reference 1: 1.6
Solution: Horizontal equity provides that taxpayers in similar situations should pay similar
amounts of tax. Significant factors can affect the ability to pay such as marital status, dependents,
and health. Vertical equity provides that taxpayers with a greater ability to pay contribute more
in taxes than taxpayers with less ability to pay. Vertical equity focuses on a fair rate structure to
calculate the tax liability.
Time On Task: 4 minutes
22. Name three other types of taxes besides the income tax that an individual may have to pay.
Title: Discussion Question 22
Difficulty: Easy
1-8
