34 



HARDWOOD RECORD 



fellowsliij) and cntliiisiasin it c'ljualleil, if it iliil not surpass, all 

 previous funi'tions. Tlii're wore about two luiiidriHl in attendance, 

 and they were (leli};litl"ully entertained by the sparkling speeches 

 of .lolin M. Woods, James Baird, Frederick iS. fnderhill and 

 several others. In addition a couple of tan-io artists illustrated 



the intricacies of that modern dance for the benefit of those 

 attending. 



The meeting and l>an()uet easily maintained the reputation for 

 liearty exchange of fjood fellowship in which particularly the 

 Indiana association has long been the premier. 



'i;;kc)!w;: 



Clear Analysis of Income Tax 



Editor's Note 

 The following article was read by Ilcnrv II. Hornbroolic licforc (he meeting of the Indiana Hardwood Lum- 

 l)ennon's As.socialion at Indianapolis, .January 14. It so clearly and sensibly sets forth the complicated 

 features of tluit recent accomplishment of the I-'ederai Congress, that it is herewith presented In the lioiief that 

 at least a portion of the readers of Hardwood Recohd will be directly interested in such explanation. 



1 have been asked to say a few words to you on the subject 

 of the federal income tax. In beginning 1 want to say that T 

 am glad to see such a staid, sober and industrious body of 

 Hoosiers. Evidently your habits here are all that could be asked 

 — anil there would be no opportunity of embarrassment coming 

 to your households such as occurred in the case of the geutieniai. 

 whose wife, when ashed what her husband's income was. replied 

 — ' ' About -1 a. m. ' ' 



We are living in the days and the land of democracy. One of 

 the blessings in disguise which our Democratic friends have 

 brought to us is the new income tax law. The income tax law 

 passed in 1894 was held unconstitutional by the Supreme Court 

 of the United States. Prior to that this country had had no 

 income tax law since 1S69 or 70. And so to most of us at least, 

 the new law brings novel questions and we must all join the 

 kindergarten for the purpose of learning our first lessons. 



But when it comes to Uncle Sam — we are all alike in this — 

 we don 't waste any time cussing the law or trying to find ways 

 of upsetting or evading the law. We simply get busy in the 

 endeavor to find out what our iluty is — and then go and do it — 

 or rather go and pay it. 



The law itself is rather intricate and the regulations issued 

 by the treasury department have not as yet cleared up all the 

 difficulties. Almost all the regulations that have been issued — 

 and the discussion that has been had in the press — have related 

 to one general phase of the law — i. e., the matter of withholding 

 at the source. This was quite natural for the reason that the 

 duty of withholding the tax at the source became an active 

 duty on November 1, 1913, and some questions had to be settled 

 at once, whereas the first schedules do not have to be filed until 

 March 1, 1914, so that the matter of making up the schedules 

 by the individual or company to be taxed was postponed for 

 later consideration. 



The time is now at hand when schedules are being mailed 

 out to the individuals who are supposed to be liable to the tax 

 — anil to all corporations — so that it is a matter requiring almost 

 immediate attention on the part of the average business man. 

 What you men here are interested in primarily is the new law 

 as it applies to you, and you are not much concerned in those 

 portions of the law which apply to classes of individuals or 

 corporations which are governed by the phases of the law which 

 do not apply to you. Some days ago I gave a talk on the income 

 tax law to a group of real estate rental agents. In that talk 1 

 discussed matters which would be wholly outside the matters in 

 which you are interested. So let us try to confine myself to 

 phases of the law which concern the average man in this audi- 

 ence. 



The men in this audience are doing business in some one of 

 three capacities — as individuals, as members of a partnership, 

 or in the form of a corporation — and the law as it applies to such 

 of these should be considered. 



First — As to the partnerships. The law contemplates no in- 

 come tax upon a partnership, and they will be required to make 

 no return; but every member of a partnership having a total 

 net income of $3,000, or more, must make a return, and that re- 



turn will include his .share of the earnings of the partnership 

 for the preceding year. It is especially provided that such share 

 of the earnings does not mean the share which may be divided, 

 but the share of what is earned by the firm. Further than this 

 J do not believe anything more need be s;iiil an the law as it 

 affects partnerships. 



Second — As to corporations. Since 19(19 there has been in 

 force the federal law imposing a tax of one per cent upon the 

 net earnings of corporations, which tax was imposed as a charge 

 for the privilege of doing business as a corporation. From the 

 total net income a deduction of $.5,000 was allowed. Under the 

 income tax law the tax of one per cent is imposed upon the 

 entire net income, without the $.5,000 deduction. With this ex- 

 ception, the law is very similar to the corporation tax law, and 

 the schedules are very similar to those which were used under 

 that law. The e.xperience which you men doing business in 

 corporate form have had in the preparation of your schedules 

 under the old law, will probably be quite sufficient to enable 

 you to make the new returns. 



Two or three things, however, should be particularly pointed 

 out, aside from the fact that no deduction of $5,000 is allowed 

 as under the old law. The first is the difference in the matter 

 of allowance for interest paid. Under the old law a deduction 

 from gross income was allowed of interest paid on an amount 

 of indebtedness equal to the capital stock of the company, so 

 that if a company was capitalized at $25,000 and carried an in- 

 debtedness of $50,000 on which it was paying interest, it was 

 allowed to deduct only the interest paid on $25,000 and thus to 

 the extent of the interest paid on the remaining $25,000 it had 

 an income for tax purposes which it did not have in fact. 



Under the new law the deduction to be made for interest is 

 thus defined: "Total amount of interest accrued and paid 

 within the year on an amount of bonded or other indebtedness 

 not exceeding one-half of the sum of its interest bearing indebted- 

 ness and its paid up capital stock outstanding at the close of 

 the year." This applied to a case similar to the above would 

 mean this — the sum of the paid up capital and the interest bear- 

 ing indebtedness is $75,000. One-half of this is $37,500, and it 

 is the interest on this latter sum which would be allowed as a 

 deduction. 



The next point to be noted is this. Under the old law I believe 

 it was necessary to make the return in every case for the calendar 

 year. This was highly inconvenient for companies whose fiscal 

 year was not coincident with the calendar year. Under the new 

 law provision is made for a corporation making its return for 

 its fiscal year instead of the calendar year, the return being 

 made within sixty dajs after the close of the fiscal year. In 

 order to take advantage of this provision proper application must 

 be made to the internal revenue collector and formal notice of 

 the fiscal year filed. 



Again — some confusion exists in the minds of many people 

 as to the duty of a corporation with reference to the dividends 

 it pays. Inasmuch as an individual is not required to pay the 

 normal tax of one per cent on dividends received from corpor- 

 ations, many have asked the question as to whether the corpor- 



