Characteristics and Income Taxation of Business Entities Flashcards
1
Q
NOL
A
- Net operating losses for taxpayers whose deductions EXCEED their income
- NOLs usually result from bsuiness and production of income related losses.
- Can be carried forward indefinitely
- Carried forward NOLs can offset up to 80% of taxable income
- Before 2021 - could be carried back 5 years and carried forward indefinitely without 80% limit
2
Q
What does flow-through entity mean?
A
It means that the entity itself is not paying any tax (but rather just the business owners)
3
Q
Sole propiertorship
A
- Not a separate legal entity
- No formation requirements
- Owned by one person (although they could have employees)
- Any business assets can be used to satisfy personal liabilities and any personal assets can be used to satisfy any buiness liablities
4
Q
Partnerships
A
- Two or more taxpayers
- No formal formation
- Each partner makes a contribution of capital, expertise or labor
- Receives share of porfits/loss
5
Q
Partnerships - General Partner vs Limited Partner
A
- General
- Unlimited legal liability as well as the partnership’s deabts and liablitiies
- Creditors can go after their personal assets to satisfy business debts
- Every partnership must have ONE genearl partner
- Involved in day-to-day opreations of business
- Limited
- Can only lose up to the amount of contribution to the partnership
- No obligation to contribute additional capital to partnership
- Are NOT allowed to partiicapte in day-to-day operations, and if they do they could lose their limited status
6
Q
General partnership vs limited partnership
A
- General is ALL GENERAL PARTNERS
- Limited partnerhsip is both kinds of partners
- Requires a formal agreement to protect liablity of limited partners
7
Q
Partnership agreement
A
- Day to day responsibilites of each partner
- HOw profits/losses will be allocated
- Who makes what decisions
- How to resolve disputes between partners
- What happens upon death of a partner
8
Q
Partnerships - Taxation
A
- Partnership MUST FILE SEPARATE annual tax return for entity
- Reports income/expenses of partnership, BUT NOT TAXED AT PARTNERSHIP LEVEL
- Pass-through taxation
- Partners report their SHARE of income/losses on their personal tax return
- Receive this from K-1 statements to indicate their share of income/losses
- A general partner’s share of income is considered SE income and subject to SE taxes AND personal income taxes
- A limited partner is NOT subject to SE taxes because they are not materially particpating in the partnership
- So only subject to personal income tax
9
Q
Partnership - Basis
A
- When a partner contributes cash or property to a partnership, there IS NO TAXABLE EVENT (no gain/loss is recognized)
- The basis becomes the contribuiton amount or the ADJUSTED BASIS for property contributions (not FMV)
- If partnerr contributes expertise/labor, partner must recognize ORDINARY INCOME for value of services provided (becomes basis)
- Every year, the partner’s adjusted basis is increased by any income received and decreased by any losses or distributions
- Partners can withdraw cash or property as needed and is these ditributions are generally NOT TAXABLE
- But does reduce basis in partnership
- Once partnerhsip basis reaches 0, anything below are treated as CAPITAL GAIN.
10
Q
LLP
A
- Limited liability partnership
- Pretty much same as partnership structure, except it’s for professional service business such as CPA, law, etc.
- Also provides more liablity protection
- A partner is not liable for any debt/malpractice from other partners’ negligence
- Only the partner’s interest in the LLP’s assets are at risk due to OTHER PARTNERS’ ACTIONS
- Personal assets are NOT at risk
11
Q
FLP
A
- Family limited partnership
- Technique to transfer wealth from one generation to antoerh and reduce future estate taxes for business owner
- Receives valuation discounts usually on the transfer of limited interest (gifts)
- Senior family members retains general partnership interest and sells/gifts the limited parnterhsip interests to the family members
- Is a flow through entity as well
12
Q
Qualified business income deduction
A
- For noncorporate taxpayers based on taxpayers; business income
- Sole prop, partnerships, and S corporations
- Also called 199A deduction
- Deduction is taken against taxable income and NOT AGI
- Deduciton is equal to 20% of taxpayers’ qualified business income from any of those entities listed above.
- Qualified business income exludes:
- capital gains/losses
- dividends
- Nonbusiness interest income
- Payments to employees
13
Q
Corporations
A
- Considered a separate entity form its owners (called shareholders)
- Shareholders provide money or property in exchange for stock in the corporation
- Shareholders have LIMITED LIABILITY only to their basis
14
Q
C Coroporation
A
- Double taxed - once at entity level and another at shareholder level
- C-corp income is taxed at the same tax rate schedule (at the entity level)
- Shareholders can be foreign or domestic and have unlimited amount
- Board of directors
- NOT FLOW THROUGH ENTITY
- Corporation does not receive deduction for distributions to shareholders
- When shareholders transfer cash to corporation, no taxable event - just increase in basis
- When property is transferred, no gain/loss recongized AS LONG AS:
- If the transferor is in control of the corporation immediately after transfer (owning at least 80% of shares)
- If the transferor of the property receives shares of the corporation in exchange for the property
- Distributions or withdrawals by shareholders are subject to taxation, but could qualify at qualified diviident rates
- IF corp has another ownership interest in another corp, it can deduct a perctange of dividens receved from other corp (to avoid triple taxation)
- If they own less than 20% of other corp: deduct up to 50% of dividends
- If they own 20-80%: 65% deduction
- More than 80%: 100% deduction
15
Q
S corporation
A
- Similar to C corp for liablity purposes, BUT TAXED LIKE PARTNERSHIPS FOR INCOME TAX PURPOSES
- Requirements for S
- Fewer than 100 shareholders
- All domestic shareholders
- Only one class of stock (unless one class has voting rights and the other doesn’t)
- Board of directors
- FLow-through taxation
- S-corp owner who works for corporation must take salary from the business for his/her job description
- To avoid SE employment taxes on income
- Shareholders DO NOT PAY SE TAXES
- Withdrawals/distribuitons are same as partnerships
