13.01 Reporting of Items from Pass-through Entities Flashcards
What are the two classifications that establish the criteria under which a business entity operates?
Legal and tax
What are the two tax classifications for entities?
Separate tax paying entity and pass-through entity
Define pass-through entity.
An entity distinct from its owners for tax purposes and is generally not subject to income tax at the entity level. Instead, entity ordinary business income (loss), tax credits, and other separately stated items pass through to the owners. The owners then include their share of the income on their personal tax returns and pay tax on the income, even if it’s not distributed.
What are examples of a pass-through entity?
Partnership and S Corporation.
True or False: An LLC is strictly a legal structure and does not refer to an entity’s taxability.
True.
A multiple-member LLC chooses how to be treated for tax purposes; its options include being treated as a partnership, C corporation, or S corporation. If no election is made, treated as partnership.
A single-member LLC can elect to be treated as a corporation (C or S) or a disregarded entity. If no election is made, treated as a disregarded entity.
What are separately stated items in regards to a Partnership?
Separately stated items are not part of the Partnership ordinary net business income (loss) because they are subject to statutory limitations or special rules when reported on the individual partners’ Form 1040 tax returns.
The purpose of separately stating items is to allow any special treatment on an individual’s income tax return to be applied. Thus, any item that is always included in the gross income of an individual without restriction or limitation need not be separately stated.
What are examples of separately stated items?
Capital gains and losses; Section 1231 gains and losses; Investment income; Passive income; Charitable contributions; Section 179 depreciation election; Tax credits; Tax-exempt income; Nondeductible expenses.
Define guaranteed payments.
Payments based on a separate contractual relationship between a partner and Partnership for services rendered by the partner or use of the partner’s capital.
Salaries are not paid to partners; instead a Partnership pays guaranteed payments.
For tax purposes, guaranteed payments, determined without regard to the income of the Partnership, that are paid to any partner for services, are treated as self-employment income.
What is a partner’s deductible loss limited to?
A partner’s deductible loss is limited to the lesser of:
1. the partner’s tax basis in the partnership interest
2. the partner’s amount at risk
3. the passive activity loss limitations, if applicable.
Which taxpayers are subject to self-employment tax?
Sole proprietor, independent contractor, general partner in a partnership, are required to pay 15.3% in self-employment tax on net earnings of $400 or more. The individual taxpayer (not the business entity) is responsible for self-employment tax.
True or False: A S corporation shareholder can receive guaranteed payments.
False.
If a shareholder performs services that are considered wages, a W-2 is issued. If the services performed are professional in nature, a Form 1099 is issued.
** S corp loss limitations
