604 Chapter 18 • taxes
STEPS To CalCUlaTe The amoUnT of exCiSe Tax
SteP 1. When expressed as a percent: Multiply the selling price of the item by the
excise tax rate.
Excise tax =Selling price ×Excise tax rate
ExamplE4
CaLCULatINg
exCIse tax
The round-trip airfare from miami to new york is $379. if the federal excise tax on airline
travel is 10% and the florida state sales tax is 6%, what is the amount of each tax and the
total purchase price of the ticket?
SolutionStrategy
Step 1.
Sales tax =Selling price ×Sales tax rate
Excise tax =Selling price ×Excise tax rate
Total purchase price =Selling price +Sales tax +Excise tax
tryitexerciSe 4
An archery set at The Sports Authority in Mason, Ohio, has a retail price of $129.95. The sales tax
in Ohio is 5%, and the federal excise tax on this type of sporting equipment is 11%. What is the
amount of each tax, and what is the total purchase price of the archery set?
REviEw ExERcisEs
Use exhibit 18-1 to determine the sales tax and calculate the total purchase price for the
following items.
Item
Selling
Price
Sales
Tax
Total
Purchase Price
1. Music CD
$8.95
$.59
$9.54
$4.88
$18.25
$9.90
$19.50
The government “takes its cut” is a good
description of the excise, or tax, charged
on various goods considered luxury items.
The word excise is from excidere,
Latin for “to cut out.” In essence, the
government cuts out its share!
In a typical year the federal government
Business World
18
Section i
85461_ch18_hr_599-639_1.indd 604 9/23/15 5:07 PM
Excise tax =Number of units ×Excise tax per unit
Total purchase price =Selling price +Sales tax +Excise tax
seCtION I • saLes aND exCIse taxes 605
Calculate the missing information for the following purchases.
Item
Selling
Price
Sales Tax
Rate
Sales
Tax
Excise
Tax Rate
Excise
Tax
Total
Purchase Price
7. Motor
$1,440.00
7%
$100.80
3%
$43.20
$1,584.00
8. Sofa
$750.00
5
$37.50
0
0
$787.50
14. Gloria Carey purchased a refrigerator at Best Buy for $899.90. The delivery charge was $20, and
the ice maker hookup amounted to $55. The state sales tax is 6
1
2
%
,
and the city tax is 1.3%.
a. What is the total amount of sales tax on the refrigerator?
b. What is the total purchase price?
15. Sig Moline purchased supplies at Office Max for a total purchase price of $46.71. The state has a
4% sales tax.
a. What was the selling price of the supplies?
b. What was the amount of sales tax?
16. Last month The Sweet Tooth Candy Shops had total sales, including sales tax, of $57,889. The
stores are located in a state that has a sales tax of 5
1
2
%
.
As the accountant for The Sweet Tooth,
calculate:
a. The amount of sales revenue for the shops last month.
b. The amount of sales taxes that must be sent to the state Department of Revenue.
17. Abby Duncan purchased a diamond necklace for $17,400 at Royal Jewelers. The state sales
taxis8%, and the federal excise tax on this type of jewelry is 10% on amounts over $10,000.
b. What is the amount of the federal excise tax?
c. What is the total purchase price of the necklace?
18. The federal excise tax on commercial aviation fuel is 4.3 cents per gallon. If Sky King
Airlines used a total of 6,540,000 gallons of fuel last month, how much excise tax was paid?
CLassrOOm aCtIvIty
As a review of Section I, have
students work Review Exercises 7–13
and resolve any differences.
Because commercial airlines are
subject to the federal aviation tax,
lopurice/iStockPhoto.com
85461_ch18_hr_599-639_1.indd 605 9/23/15 5:07 PM
$219.95
2
10
$109.99
5
$5.50
$122.09
0
0
$18,785.00
0
0
606 CHAPTER18•TAXES
ProPerty tax
Most states have laws that provide for the annual assessment and collection of ad valorem
taxes on real and personal property. Ad valorem tax means a tax based on the assessed value
of property. The term property tax is used interchangeably with the term ad valorem tax.
Property taxes are assessed and collected at the county level as the primary source of revenue
for counties, municipalities, school districts, and special taxing districts.
Real estate, or real property, is defined as land, buildings, and all other permanent
improvements situated thereon. Real estate is broadly classified based on land use and
Personal property is divided into two categories for ad valorem tax purposes:
• Tangible personal property such as business fixtures, supplies, and equipment and
machinery for shops, plants, and farms
• Household goods (exempt from property tax in most states) such as apparel, furniture,
CalCulating the amount of ProPerty tax
On the basis of the fair market value, less all applicable exemptions, the property tax due is
computed by applying the tax rates established by the taxing authorities in that area to the
assessed value of the property.
18-5
SECTION II
18
ad valoremor property taxA tax
based on the assessed value of property,
generally collected at the city or county
level as the primary source of revenue for
counties, municipalities, school districts, and
special taxing districts.
purposes, divided into tangible personal
property such as business equipment,
fixtures, and supplies and household
goods such as clothing, furniture, and
appliances.
assessed valueThe value of property
Business Decision: splitting the tax
19. You are the owner of Caché, a chain of women’s clothing boutiques. Your state has a sales
tax of 6%, and your city has an additional sales tax of 1.5%. Each quarter you are responsible
for making these tax deposits to the city and state. Last quarter your stores had total revenue,
including sales tax, of $376,250.
a. How much of this revenue was sales and how much was sales tax?
b. How much sales tax should be sent to the city?
c. How much sales tax should be sent to the state?
SECTIONII•PROPERTYTAX 611
Review exeRcises
Calculate the assessed value and the property tax due on the following
properties.
Fair Market
Value
Assessment
Rate
Assessed
Value
Property
Tax Rate
Property
Tax Due
1.
$240,000
90%
$216,000
4.1%
$8,856.00
2.
$95,500
75
$71,625
$1.80
per
$100
$1,289.25
3.
$310,000
100
$310,000
$17.25
per
$1,000
$5,347.50
4.
$194,460
80
$155,568
mills $5,522.66
Calculate the property tax rate required to meet the budgetary demands of the
following communities. Note: When calculating budgetary demands, always
round up.
Community
Total Assessed
Property Valuation
Total Taxes
Required
Property Tax Rate
Percent
Per
$100
Per
$1,000 Mills
13. Bay Harbor
$850,000,000
$39,450,000
4.65%
$4.65
$46.50
46.5
$657,000,000
$32,300,000
$338,000,000
$19,900,000
$57,000,000
$2,100,000
18. Chuck Wells purchased a condominium with a market value of $125,000 in The Villages.
The assessment rate is 70%, and the tax rate is 19.44 mills.
a. What is the assessed value of the condo?
b. What is the amount of property tax?
19. As the tax assessor for Indian Creek County, you have been informed that due to budgetary
demands, a tax increase will be necessary next year. The total market value of the property in
the county is $600,000,000. Currently, the assessment rate is 45% and the tax rate is 30 mills.
The county commission increases the assessment rate to 55% and the tax rate to 35 mills.
a. How much property tax was collected under the old rates?
b. How much more tax revenue will be collected under the new rates?
SECTION II
18
100
3.44%
$125,000
100
$1.30
$100
$248,000
$25.90
$1,000
45.5
$177,400
$2,330,000
100
13.22
$342,900
5.3%
$90,230
90
$12.50
$1,000
612 CHAPTER18•TAXES
Income Tax
“The Congress shall have power to lay and collect taxes on incomes, from whatever source
derived. . . .” These are the words of the Sixteenth Amendment to the Constitution of the
United States. Passed by Congress in 1909 and ratified in 1913, this amendment paved the
way for the evolution of the federal income tax system as we know it today.
Income taxes, both personal and corporate, compose the largest source of receipts for our
federal government. In a typical year, individuals pay over $1 trillion in federal income taxes
and businesses pay more than $200 billion. In addition to the federal income tax, many state
governments have also imposed income taxes on their citizens to finance government activities.
Income tax is a pay-as-you-go tax. The tax is paid as you earn or receive income through-
out the year. As we learned in Chapter 9, payment is accomplished through income tax with-
Exhibit 18-5 on pages 622–623, Form 1040, U.S. Individual Income Tax Return, is the
most widely used form for individuals filing tax returns. It is known as the “long form.”
Based on tax filing options, individuals may qualify to use one of the “short forms,” 1040A
or 1040EZ. Although the tax rules and forms change almost every year, the method for cal-
Section iii
income taxA pay-as-you-go tax based
on the amount of income of an individual
or a corporation.
tax returnThe official Internal Revenue
Service forms used to report and pay
income taxfor income earned during the
PMSI Web Hosting and Design/iStockphoto.com
calculaTIng Taxable Income
for IndIvIduals
Taxable income is the amount of income to which tax rates are applied in order to calculate
the amount of tax owed for the year. Exhibit 18-2 is a schematic diagram of the procedure
18-7
taxable incomeThe amount of income
Business Decision: eARLY PAYMenT, LATe PAYMenT
20. You own an a townhome with an assessed value of $185,400. The tax rate is $2.20 per $100
ofassessed value.
a. What is the amount of property tax?
b. If the state offers a 4% discount for early payment, how much would the tax bill amount to
if you paid early?
c. If the state charges a mandatory 3
1
2
% penalty for late payments, how much would the tax
bill amount to if you paid late?
18
85461_ch18_hr_599-639_3.indd 612 9/23/15 5:08 PM
626 CHAPTER18•TAXES
Review exeRcises
as a tax return preparer for The fernando rodriguez Tax & accounting service, you have
been asked to calculate the missing information for eight of the firm’s tax clients. use the
standard deductions listed on page 613.
Section iii
ExamplE14
 CAlCulATingCoRPoRATEinComETAX
AnDAfTER-TAXnETinComE
Landmark Industries had net income before taxes of $7,550,000. Use the Corporate Tax Rate
Schedule to calculate the amount of income tax due and calculate the company’s net income after
taxes.
SolutionStrategy
step 1. Landmark’s net income falls in the range 335,000 to 10,000,000.
step 4.
2,453,100 Result from Step 3
+ 113,900 Dollar amount of tax indicated for that rang
e
$2,567,000 Tax liability
7,550,000 Income before taxes
tryitexerciSe 14
The Trough Restaurant had taxable income of $311,200 last year. Use the Corporate Tax Rate
Schedule to calculate the amount of income tax due and calculate the company’s net income after
taxes.
18
Name
Filing Status
(Exemptions) Income
Adjustments to
Income
(circle your choice)
Exemption
Allowances
Taxable
Income
Adjusted Gross
Income
Standard
Deduction
Itemized
Deductions
1. O’Connell Single (1) $34,300 $2,120
$32,180
$6,200 $4,870
$3,950
$22,030
A qualifying domestic corporation with
35 or fewer shareholders may elect to
shareholders, who will be responsible for
reporting the amounts on their personal
income tax returns.
Business World
85461_ch18_hr_599-639_3.indd 626 9/23/15 5:08 PM
SECTioniii•inComETAX 627
Name
Filing Status
(Exemptions) Income
Adjustments to
Income
(circle your choice)
Exemption
Allowances
Taxable
Income
Adjusted Gross
Income
Standard
Deduction
Itemized
Deductions
6. Campbell Married filing
jointly (5) $52,130 $1,450
$50,680
$12,400 $5,610
$19,750
$18,530
9. Nancy Sullivan sells wholesale school supplies for Sharpie Corporation. She is single, claiming
three exemptions. For income tax purposes, she qualifies as a head of household. Last year she
earned a total of $54,300 in salary and commission. She contributed $2,500 to her retirement
plan and had the following itemized deductions: $1,231 in real estate taxes, $3,450 in mortgage
interest, $2,000 in mortgage loan closing points, $420 in charitable contributions, and $3,392 in
unreimbursed job expenses above the 2% adjusted gross income exclusion. From this informa-
tion, calculate Nancy’s taxable income.
use the Tax Table, exhibit 18-3, to calculate the tax liability for the following taxpayers
earning under $100,000.
Name Filing Status Taxable Income Tax Liability
10. Julian Single $62,340
$11,438
use the Tax Computation Worksheet, exhibit 18-4, to calculate the tax liability for the
following taxpayers earning $100,000 or above.
Name Filing Status Taxable Income Tax Liability
15. Rua Head of Household $175,800
$39,810.00
16. Dylewski Married, Jointly $121,430
$22,070.00
as a newly hired Irs trainee, you have been asked to calculate the amount of tax refund
or tax owed for the following taxpayers.
Name
Tax
Liability
Tax
Credits
Other
Taxes Payments
Refund/Owe
(circle one) Amount
20. Jackson $7,525 $1,670 $840 $5,300 Refund/Owe
$1,395
$4,080
$11,850
$51,440
$38,246
$15,800
628 CHAPTER18•TAXES
25. Buck and Meghan Calder had combined income of $97,320 last year. For tax purposes, the
Calders claim four exemptions and their filing status is married filing jointly. They contributed
$5,000 to their retirement plan and had total itemized deductions of $17,200. In addition, the
Calders had a tax credit for the disabled of $3,430. If their combined income tax withheld last
year amounted to $10,887, calculate the following:
a. Adjusted gross income
b. Taxable income
c. Tax liability
d. Are the Calders entitled to a refund, or do they owe additional taxes? How much?
Calculate the amount of corporate income tax due and the net income after taxes for the
following corporations.
Name Taxable Income Tax Liability
Net Income
after Taxes
26. All City Plumbing, Inc. $352,100
$119,714.00
$232,386.00
Business Decision: invesTing YouR TAx sAvings
30. You are a manager for Vector International. You earn $50,000 per year and are in the 28%
federal income tax bracket. Each year you contribute $2,500 tax free to your individual retire-
ment account, IRA. The account earns 8% annual interest. In addition, the amount of tax that
you save each year by making these “pre-tax” contributions is invested in a taxable aggressive
growth mutual fund averaging 15%.
a. How much tax do you save each year by making the retirement fund contributions?
b. How much will the retirement fund be worth in 30 years?
c. Although the income from this investment is taxable each year, how much will the “tax sav-
ings” fund be worth in 30 years?
payments. The IRS will electronically—
account with your refund.
You may also use a debit or credit
card to make tax payments using the
www.officialpayments.com/fed
• Link2Gov Corporation 1-888-PAY1040
(1-888-729-1040) www.pay1040.com
• RBS WorldPay, Inc. 1-888-9-PAYTAX
(1-888-972-9829) www.payusatax.com
Dollars
and Sense
85461_ch18_hr_599-639_3.indd 628 9/23/15 5:08 PM