Ch04: TaBS Flashcards
Sole proprietorship
Pass-through: income and losses are taxed at the owner’s tax rate (Schedule C, Form 1040)
Losses can offset alternate income streams if the business is actual and not just a hobby.
Partnership
Pass-through: the partnership as an entity files its own tax return (form 1065) yet the proportionate income streams and expenses ascribed to each partner (schedule K-1) are taxed at each partner’s personal tax rate.
Two classes:
General Partner: the general partner doesn’t enjoy limited liability
Limited Partner: is tied to the liability in proportion to the amount each partner invests in the business
Tax Losses:
- At-risk limitations restrict the amount of losses deductible to the amount of risk the partner took on
- Passive activity rules restrict the losses to the extent of passive income until the ownership stake is sold; Passive activity defines business activity the partner is materially involved with; if the losses aren’t passive, they can be treated as NOLs
Sales of ownership stakes are taxed as capital gains or losses.
Limited Liability Corporation, LLC
Pass-through: Taxed as partnerships. Legally, an LLC is not partnerships or corporations. But the structure allows for an unlimited number of shareholders as owners and protects shareholders from personal liability.
Passive activity rules apply as they do in the partnership.
S. Corporation
Pass-through: a corporation providing its shareholders with limited liability. The number of shareholders allowed to be owners is currently 100; there are also restrictions that limit the type of shareholder and the ability to raise large amounts of capital.
Passive activity rules apply as they do in the partnership.
C. Corporations
Double taxation: owners are taxed at the corporate level, then taxed on income from the corporation (dividends, capital gains) at their ordinary tax rates.
NOLs are suspended at the corporate level; they cannot flow to the shareholders; tax losses can be carried back 2 years or carried forward 20 years.
