ATO1 Study Session
What you need to know to pass ATO1
Competency 302.2.1: Current Tax System. The student understands the nature, purpose, and scope of the current U.S. tax system. Differentiate between U.S. federal income tax system and other tax models. The United States of America is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, payroll, property, sales, imports, estates and gifts, as well as various fees. Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax rules, not accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses. Recognize how taxes influence decision making by individuals. Taxes can influence how much people do or do not spend. It can determine if people invest, build or buy a home and several other decisions. Identify the professional, ethical, and legal responsibilities of a tax preparer. The Standards of Professional Conduct for The National Association of Tax Professionals is a list of 11 standards based on one of three different responsibilities. The first responsibility is to protect and advise the client. The second is to the tax professional, who has a responsibility to conduct himself and his practice in such an ethical way that he will not jeopardize his reputation or self-respect. The third is to the government. While his fiduciary responsibility is to the client, the tax professional cannot forget that he may be called to explain and represent decisions made on the return before the IRS. As such, ethics play a vital role in the balance between representing the taxpayer, yet satisfying the legal requirements of the federal government. Recognize appropriate methodologies and sources for tax research. Taxalmanac.org, www.irs.gov, www.gaap.org, www.fasb.org
Recognize the differences in income tax liability resulting from the use of accrual basis vs. cash basis. In financial reporting the cash method of accounting is used when accounting records revenue when cash from customers is received, and records expenses when they are paid in cash. In the tax environment cash basis tax payers include income when it is received, and claim deductions when expenses are paid. Accrual basis taxpayers include items when they are earned and claim deductions when expenses are incurred. An accrual basis taxpayer looks to the “all-events test” and “earlier-of test” to determine when income is earned. Under the all-events test, an accrual basis taxpayer generally must include income for the taxable year when all the events have occurred that fix the right to receive income and the amount of the income can be determined with reasonable accuracy. Competency 302.2.2: Tax Treatments for Partnerships, Estates, and Trusts. The student determines the tax treatment for partnerships, estates, and trusts. Identify the differences between how entities are taxed for example: Individuals, Partnerships, Corporations, S-Corporations, Estates and Trusts. An income tax is a tax levied on the income of individuals. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. Partnerships have flow-through taxation which means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their distributive share of the entity's taxable income, even if no funds are distributed by the partnership to the owners. An S-Corporation is not subject to corporate tax rates. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Instead, an S-Corporation...
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