Fundamentals of Taxation for Individuals and Business Entities: A Practical Approach

An innovative approach to understanding the federal income tax laws and using them to develop tax-efficient strategies for individuals and businesses. Present the big picture with a practice-based approach to understanding tax laws so students can develop critical thinking and problem-solving skills that prepare them for the real world. Fundamentals of Taxation for Individuals and Business Entities, 2025 Edition introduces a logical foundation for the income tax system so students can understand why a law exists and how to apply the law to practical tax problems. Professional skill-building exercises develop critical thinking and communication skills and the ability to identify and address ethical dilemmas, preparing students to be effective tax professionals.

Table of Contents:
Part I Introduction to Income Taxation 1 The Professional Practice of Taxation 1-1 1.1 The Basics of Tax Planning 1-4 1.2 Individual Income Tax Formula 1-7 1.3 Tax Compliance vs. Tax Planning 1-15 1.4 Tax Avoidance vs. Tax Evasion 1-28 1.5 Tax Rules vs. GAAP 1-32 1.6 Goals of Tax Policymakers 1-33 1.7 Other Taxes Paid by Individuals 1-38 1.8 Professional Taxation as a Career 1-41 2 Fundamentals of the Federal Income Tax System 2-1 2.1 Taxpayer Activities: Trade or Business, Investment, or Personal Use 2-4 2.2 Classification of Assets 2-10 2.3 Basis 2-14 2.4 Foundations of Income 2-17 2.5 Foundations of Deductions 2-21 2.6 Introduction to Property Transactions 2-24 3 Tax Authority, Research, Compliance Rules, and Professional Responsibilities 3-1 3.1 Sources of Tax Authority 3-5 3.2 Locating and Evaluating Authority 3-17 3.3 Compliance Responsibilities 3-20 3.4 Tax Professional Responsibilities 3-31 3.5 Tax Practice and Procedure 3-36 4 Dependents and Filing Status 4-1 4.1 Dependents—Introduction and Qualifying Child 4-3 4.2 Qualifying Relative and Other Dependency Rules 4-11 4.3 Filing Status—Introduction 4-16 4.4 Head of Household and Qualifying Widow(er) 4-21 4.5 Dependent on Another Return and Kiddie Tax 4-28 4.6 Filing Requirements 4-32 Part II Income 5 Framework for Income Recognition 5-1 5.1 All-Inclusive Approach to Income 5-4 5.2 Judicial Doctrines 5-8 5.3 Accounting Methods and Periods—Income 5-14 5.4 Business Income for Individuals 5-24 5.5 Qualified Business Income Deduction 5-30 6 Income from Personal Activities 6-1 6.1 Income from Prizes, Awards, and Scholarships 6-6 6.2 Divorces 6-10 6.3 Income and Basis Issues for Gifts and Inheritances 6-14 6.4 Income from Injuries and Other Damage Awards 6-26 6.5 Income from Death of a Taxpayer 6-31 6.6 Forgiveness of Debt 6-35 6.7 Other Inclusions and Exclusions 6-40 7 Income from Services 7-1 7.1 Wages and Tip Income 7-6 7.2 Income from Insurance-Related Fringe Benefits 7-9 7.3 Income from Other Fringe Benefits 7-18 7.4 Stock Options 7-27 7.5 Reimbursement of Employee Business Expenses 7-34 7.6 Retirement Plans 7-36 7.7 Distribution Rules 7-47 7.8 Social Security Benefits 7-54 7.9 Foreign Earned Income 7-57 Part II (Ch. 5–7): Comprehensive Tax Return Problem Part III Deductions 8 Framework for Deductions 8-1 8.1 Types of Activities 8-4 8.2 Disallowance of Deductions 8-8 8.3 Types of Deductions 8-13 8.4 Accounting Methods for Deductions 8-15 8.5 Capital Expenditure vs. Repair 8-22 8.6 Accounting for Inventories 8-24 9 Deductions for AGI and Itemized Deductions 9-1 9.1 Deductions for AGI 9-5 9.2 Deductions from AGI: Itemized Deductions vs. Standard Deduction 9-14 9.3 Medical Expenses 9-16 9.4 Taxes 9-20 9.5 Interest 9-25 9.6 Charitable Contributions 9-30 9.7 Casualty Losses 9-42 9.8 Other Itemized Deductions 9-45 10 Business Expenses 10-1 10.1 Business Expense Requirements 10-4 10.2 Transportation and Travel Expenses 10-8 10.3 Entertainment and Education Expenses 10-14 10.4 Business Interest 10-18 10.5 Bad Debts 10-21 10.6 Net Operating Losses 10-23 10.7 Excess Business Losses 10-29 11 Limitations on Business Losses and Expenses 11-1 11.1 Business Use of a Home 11-4 11.2 Hobby Losses 11-11 11.3 Vacation Homes 11-14 11.4 Basis and At-Risk Limitations 11-23 11.5 Passive Loss Rules 11-25 11.6 Losses from Partnerships and S Corporations 11-34 Part III (Ch. 8–11): Comprehensive Tax Return Problem Part IV Taxation of Property Transactions 12 Taxation of Investment Income 12-1 12.1 Interest Income 12-4 12.2 Dividend Income 12-14 12.3 Capital Gains and Losses 12-22 12.4 The 3.8% Net Investment Income Tax 12-36 13 Cost Recovery of Property 13-1 13.1 General MACRS Rules 13-5 13.2 Additional Cost Recovery Rules 13-15 13.3 Amortization 13-26 13.4 Depletion 13-29 14 Taxation of Assets Used in a Trade or Business 14-1 14.1 Distinguishing Section 1231 Assets from Ordinary and Capital Assets 14-4 14.2 Identifying Types of Section 1231 Assets 14-7 14.3 Netting Section 1231 Gains and Losses 14-10 14.4 Section 1245 Depreciation Recapture 14-15 14.5 Section 1250 Depreciation Recapture 14-20 15 Property Transactions: Nonrecognition of Gains and Losses 15-1 15.1 Related-Party Losses 15-4 15.2 Wash Sales 15-9 15.3 Like-Kind Exchanges 15-15 15.4 Involuntary Conversions 15-26 15.5 Loss on Sale of Personal Use Assets 15-32 15.6 Sale of Principal Residence 15-33 Part IV (Ch. 12–15): Comprehensive Tax Return Problem Part V Other Individual Topics 16 Personal Tax Credits 16-1 16.1 Introduction to Personal Tax Credits 16-4 16.2 Child Tax Credit 16-7 16.3 Credit for Other Dependents (Family Tax Credit) 16-10 16.4 Child and Dependent Care Credit 16-11 16.5 Earned Income Tax Credit (EITC) 16-18 16.6 Education Credits 16-25 16.7 Other Personal Tax Credits 16-32 17 Alternative Minimum Tax and Other Taxes 17-1 17.1 Alternative Minimum Tax (AMT) 17-4 17.2 Social Security, Medicare, and Self-Employment Taxes 17-17 17.3 Other Taxes 17-24 Parts II–V (Ch. 4–17): Comprehensive Tax Return Problem Part VI CPA Evolution: Core—Tax 18 Business Entity Topics: CPA Exam Core—Taxation and Regulation 18-1 18.1 Corporations: Taxable Income Computation and Special Deductions 18-5 18.2 Other Corporate Tax Issues 18-19 18.3 Business Tax Credits 18-29 18.4 S Corporations 18-40 18.5 Partnerships and Limited Liability Companies 18-61 Part VI (Ch. 18): Comprehensive Tax Return Problem Appendix A Tax Formula Items A-1 Appendix B Tax Forms B-1 Glossary G-1 Index I-1

About the Author :
DR. GREGORY CARNES serves as Dean of the Sanders College of Business and Technology and Raburn Eminent Scholar of Accounting at the University of North Alabama. Dr. Carnes is well known nationally as an academic leader, having served on the boards of numerous academic organizations. Dr. Carnes has authored tax material for CPA Review courses for more than 20 years and has delivered tax training for national accounting firms and approximately 20 accounting state societies. He has published approximately 30 articles in leading academic and professional journals. SUZANNE YOUNGBERG joined the faculty at Northern Illinois University as a full-time member in 2000 and is currently teaching in the accounting graduate and undergraduate programs. Prior to NIU, she worked for five years in the tax department of a medium-sized public accounting firm and then maintained her own tax practice for 30 years specializing in individual and small business compliance and strategic tax planning. Suzanne received her Bachelor of Science in Accountancy from NIU and her Master of Science in Taxation from DePaul University.