Income Tax Roadmaps

Question 1

Form 1040 Flow Chart

Answer 1

Gross income
(less adjustments / “above the line”)

Adjusted Gross Income
(less deductions / “below the line”)

Taxable Income
(times appropriate tax rates)

Taxable Calculations
(less credits plus other taxes)

Tax Liability
(less quarterly payments and withholding)

Net Tax Due / Refund

Question 2

Characteristics and income taxation of business entities

Think:

• Business if profitable
• Business has losses - risky free versus risky entities

Answer 2

Business if profitable

C CORPORATION

1. Separate entity
2. Dividend received deduction of 50%

PERSONAL SERVICE CORPORATION (PSC)
No graduated tax rates (flat 21%)

Business has losses

Risk-free entity:
Keys apply to both:
1. Pension plan (KEOGH)
2. 100% medical, dental, LTC insurance deductible to owner
3. Lack of continuity 
SOLE PROPRIETERSHIP

PARTNERSHIP
4. Losses up to basis

Risky Entities

S CORPORATION

1. Pension plan
2. 100% medical, dental, LTC insurance deductible for 2% owner
3. Losses up to basis
4. Special requirements: 100 shareholders max; one class of stock (no preferred); domestic; US citizen or resident; all shareholders consent to election
   (note: husband and spouse =1; ESOP=1)

LIMITED LIABILITY CORPORATION

1. Limited liability (like corp)
2. Losses up to basis (like partnership)

LIMITED PARTNERSHIP

1. Limited partners can’t actively participate
2. Losses up to basis

NOTE: For exam if business generalizes losses must be pass through not corp