7.1 - Definition & Accounting Flashcards
How is an entity with two or more members classified if no election is made for a newly formed domestic entity?
As a partnership
How is an entity with a single member classified if no election is made for a newly formed domestic entity?
Disregarded as an entity separate from the owner (sole proprietorship)
How is a newly formed foreign entity with limited liability classified?
As an association taxed as a corporation
Identify entities treated as corporations
- Ones incorporated under state or federal law;
- associations;
- joint stock companies;
- insurance companies;
- insurance companies;
- certain banks;
- state-owned organizations;
- certain foreign organizations;
- publicly traded partnerships
What are C corporations?
Corporations other than S corporations
What is an S corporation?
A pass-through entity that is not subject to the regular corporate income tax and treated similarly to partnerships.
True or False»_space;> partnerships, trusts and estates are generally treated as corporations.
False – are not treated as corporations
How are publicly traded partnerships taxed?
As corporations
What is a limited liability company or LLC?
- would normally elect partnership status to avoid being taxed as a corporation;
- partnership election allows for limited liability of the owners while at the same time retaining the single taxation;
- owners are allowed to participate in the operations of the business and there are no restrictions on the type of owners
What is a professional association or PA?
An association of professions (e.g. accountants, doctors or lawyers, is treated as a corporation for tax purposes if it is both organized under a state’s Professional Association Act and operated as a corporation
Can one individual be considered a professional association?
Yes
What is a Personal Service Corporation or PSC?
- Principal activity is performing personal services, substantially by employee-owners;
- taxed at flat rate of 35% & corporate rates do not apply
How much stock must an employee-owner own in a Personal Service Corporation?
More than 10%
When might the IRS allocate income, deductions, credits, exclusions, and other allowances between a Personal Service Corporation (PSC) and its employee-owners?
If substantially all the PSC’s services are performed for one other corporation, partnership, or entity, and the principal purpose of the PSC is tax avoidance.
What is a Personal Holding Company or PHC?
Any nonexempt closely held corporation having a significant portion of its income being passive in nature and are subject to a penalty tax on excess personal holding company income
Define “check the box” regulations?
Allows an eligible entity to decide whether it will be taxed as a corporation or a partnership
Define an eligible entity for “check the box” status?
A business that is not required to be treated as a corporation under federal tax law.
What type of business do “check the box” regulations apply to?
Business entities other than trusts that are separate for federal tax purposes
Define the tax year a PSC or Personal Service Corporation is required to use.
Calendar tax year except for a valid business purpose or a PSC that makes “minimum distributions”
When are corporate tax returns due?
On or before the 15th day of the 3rd month following the close of the tax year (e.g. 3/15th for a calendar year corporation)
What are the requirements for a corporation to get a 6-month extension on tax filings?
- file form 7004 and pay estimated unpaid tax liability
Is a formal election required for the accounting method of a newly incorporated C corporation?
No – any method may be “elected” by using that method on the initial return.
What type of entities may elect to use the cash method of accounting?
- PSCs;
- S Corporations;
- Certain farming corporations;
- C Corporations that have average annual gross receipts of no more than $5 million in the 3 preceding tax years.
Are tax shelters allowed to use the cash method?
No
What is the corporate income tax formula?
Income – Exclusions – Deductions * Tax Rate – Credits + AMT + FICA Taxes + Special Taxes = Tax Liability or Refund Receivable
