Business Entity Choice

Question 1

What are 4 tax classifications for business entities?

Answer 1

Corporations (C and S).
Partnerships.
Trusts.
Disregarded entities.

Question 2

Check-the-box regulations: what are 5 per se corporations?

Answer 2

• entities incorporated under state law
• insurance companies
• publicly-traded partnerships
• specified foreign entities
• other entities (such as REITs: real state investment trust, tax-exempt organizations, and entities with S corp election)

Question 3

What are 2 major classification of business entities?

Answer 3

• Corporation if on per se list.

* Unincorporated business entities

Question 4

What are under unincorporated business entities?

Answer 4

• Partnership if 2 or more owners

* Disregarded entity if one owner

Question 5

When must “the box checked”?

Answer 5

When an entity choose classification besides the default one.

Question 6

Can unincorporated entities elect to be taxed as an association/corporation if they prefer?

Answer 6

Yes.

Question 7

When an election under the check-the-box regulation is made, when would it be effective?

Answer 7

For the tax year if made within the first 75 days of the year.

Question 8

Can the election for the check-the-box regulations be changed?

Answer 8

Yes, only after 5 years or with IRS permission.

Question 9

List the entity: Yes to limited liability? No?

Answer 9

Yes: C Corp, S Corp, Limited partnership, Multi-member LLC.
No: General partnership, sole proprietorship (include single member LLC).

Question 10

List the entity: Yes to double taxation? No?

Answer 10

Yes: C Corp.
No: S. Corp, partnership, LLC, Sole P.

Question 11

List the entity: Yes to retain income inside of the entity at lower tax cost? No?

Answer 11

Yes: C corp (depend on relative tax rates).
No: S Corp, partnership, LLC.
N/A: Sole P.

Question 12

List the entity: Yes to tax deferred contribution? No?

Answer 12

Yes: C Corp (possibly - subject to control test), S Corp (possibly - subject to control test), Partnership, LLC.
N/A: Sole P.

Question 13

List the entity: Yes to double taxation on distribution? No?

Answer 13

Yes: C Corp, S Corp (possibly).
No: Partnership, LLC, Sole P.

Question 14

List the entity: Yes to owner’s basis for entity level debt? No?

Answer 14

Yes: Partnership
No: C Corp, S Corp, LLC
N/A: Sole P.

Question 15

What are advantages of partnerships (and LLCs)?

Answer 15

• Single taxation.
• Flexibility (can choose profit/loss ratio: S Corp can have only one stock and can’t have preferential distribution).
• Basis increase for debt.
• Tax-free contributions, admissions and distributions, withdrawals (generally).

Question 16

What are disadvantages of partnerships (and LLCs)?

Answer 16

• Unlimited liability for general partners
• Limited partners have limited management rights.
• Distributive share for general partnership is subject to self-employment tax (The biggest disadvantage) - there are Medicare and Social Security (self-employment tax). Social Security is charged only up to certain amount. If the owner has other income that make them above the limit, then they won’t be paying the tax and can just consider Medicare portion.

Question 17

Which entity can make a distribution of appreciated property to its owners that would not be taxable to the business entity or to its owners?

Answer 17

General partners and a limited liability partnership.

When appreciated property is distributed to a partner, no gain is recognized by the partnership. However, if a C corporation or S corporation distributes appreciated property, gain must be recognized by the corporation.

Property distributions never create gain for a partner. Gain is recognized by the partner only if cash distributed exceeds the basis in the partnership interest. C corporation and S corporation shareholders may have to recognize income when receiving property distributions.

Question 18

Is S Corp liable for Alternative minimum tax?

Answer 18

Since S corporation income flows directly to the shareholders, the corporation is not subject to the AMT.

Question 19

Is not-for-profit organization entitled to net operating loss deductions?

Answer 19

Not-for-profit organizations do not pay any tax therefore they are not entitled to a net operating loss deduction.

Question 20

Passive activity limits are applied to?

Answer 20

to the following entities: individuals, estates, trust, personal service corporations and closely-held personal service corporations.