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Accounting: Tax Reform

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1. Research the most common tax loopholes used by corporations and partnership to avoid paying federal income tax. Discuss two (2) loopholes identified and what strategies you would recommend to the federal government for closing these loopholes.
2. Evaluate whether or not the federal government benefits from allowing corporations to select S status.
3. Discuss whether you believe the current gift tax laws are fair to the taxpayer. Recommend a change that you would like to incorporate into the tax code related to gift taxes.
4. Create an argument for or against abolishing estate taxes.
5. Recommend an alternative to the current federal taxation system that you believe would be fair to corporations and partnerships.
6. Use 4 to 6 external sources.

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Most common loopholes used by corporations and partnerships to avoid paying income tax:

Studies over the recent past have shown that very few corporations pay taxes on their profits with other companies not paying any tax at all through the use of complex international tax loopholes. Out of 280 corporations examined from 2008 to 2010 showed that 30 of the corporations used tax loophole to not pay tax at all or to wind up with negative tax rates. The law requires that corporations pay 35% tax rate on their profits but many corporations use tax loop holes to either pay lower rates or not pay at all (Business Insider, 2011).

The various tax loopholes that are often used include: inventory property sales where goods produced in the U.S. and sold in foreign countries are viewed as income generated by that country thereby granting the corporation tax credits; graduate corporate income; Exclusion of interest on local and state bonds; experimentation and research tax credit; deferred taxes on certain income earned overseas for financial firms; production of alcohol based Fuel tax credit; credit for low income housing investments; higher depreciation of equipment and machinery; deduction for domestic manufacturing; Deferred income from foreign subsidiaries of corporations; Double Irish, Dutch Sandwich strategy used by with Intellectual Property; and siphoning taxable incomes into tax haven states with other subsidiaries (Business Insider, 2011).

Discussing two loopholes:

Double Irish, Dutch Sandwich Strategy / shifting income to tax haven countries

This tax loophole strategy involves shifting income to their subsidiaries in low tax countries and is mainly used by technology firms such as Google, Face book and Microsoft Corporation. Over the past three years, Google cut it taxes by $3.1 billion using this strategy where it moves most of its foreign profits through Ireland and the Netherlands to Bermuda (Drucker, 2010).

In this strategy corporations take advantage of the favorable Irish tax laws to legally shift profits in and out of the corporations subsidiaries in that country thereby escaping paying taxes both in the country and abroad. They do this by selling or licensing intellectual property rights developed in the US to foreign subsidiaries and thereby profits based on the technology in the foreign country gets attributed to the foreign units and not the parent company. Most of the earnings end up in island havens such as Bermuda and Cayman Islands where there no corporate taxes levied. By registering their assets in tax haven countries and their liabilities remaining in the U.S., they are able to reduce their taxable domestic income. This income shifting reduced Googles tax rate to 22.2% from 35% in 2009, and have largely undermined the U.S tax rate (Drucker, 2010; Walton, 1996).

Experimentation and Research tax credit:

Corporations such as agriculture conglomerates, Pharmaceutical companies, or technology companies take advantage of the tax credit meant to spur development and often allows for 20% of the tax credit for all research and experiment expenses in a company. It has often been argued that some corporations are often paid to do research that they would have done anyway using the even without the tax credit (Business Insider, 2011).

What the government can do to close these loopholes:

In the first loophole, since most of the shifting of income to tax haven involve transfer pricing transactions among subsidiaries in various countries that make it possible to allocate incomes to countries with favorable tax structures while attributing expenses to countries with high tax ...

Solution Summary

This solution provides a detailed discussion of the given accounting questions.