Taxation of Business Entities Flashcards
Sole Proprietorship
Advantages:
easy to set up and terminate
Pension Plans (Keogh, SEP)
100% med, dental, LTC ins deductible 2% owner
No legal formalities
Conduit of income and losses to owner (Schedule C)
Risk Free Entity
Disadvantages:
Not easy to raise capital
Business dies with owner
Capital Structure dependent on resources of owner
TAX
Income and losses to owner
Losses up to basis
Basis = cash plus loans made to s corp (no bank loans)
Cash distributed by s corp is nontaxable return of investment..reduces basis
Unearned income left in co increases basis
If owners paid salary-must pay FICA and FUTA
No NOL 2yr look back…must carry losses forward
If borrowed $ for business - interest paid on debt is deductible with out limit on schedule C
Partnership
- Two or more owners that carry out business for profit
- Share in profit and losses of business
- Participate in management and operation
- An entity separate and apart from members (can be sued)
- Contribution of $ or property to fund is not taxable
Advantages:
Pension plans (Keogh, SEP)
100% medical insurance deductible by partners
Partnership Agreement can be oral (should be written)
Conduit of income and losses to owner
Disadvantages:
Unlimited personal liability for acts of partnership or partner
Dissolves upon DEATH, bankruptcy, incapacity
Capital structure depends on resources of partner
Risk Free Entity (little liability or no liability connected to the business)
BASIS = Cash contribution + property contribution (carryover basis) -distributions - liabilities assumed by partnership
flow through taxed to individual partner on 1040
Receive a K-1
LLC
Can be classified as a partnership or a corporation
Limited liability like an S Corp, losses up to “at risk” basis like partnership
If partnership, can have no more than 2 of the following:
- Centralization of management
- Continuity of life
- Limited liability
- Free transferability of interests
Governed by state law
Members can’t be involved in daily activity without losing limited liability status
LLP
Partnership where general partners are not personally responsible for malpractice claims of another General Partner
Must have 1 General Partner
Used mostly when converting from partnership or sole proprietorship
C Corp
Separate tax entity
Distributed after tax earnings double taxed (to owners that receive it as well)
Taxes filed on 1120
Taxed 15%, 25%, 34%, 39%, 34%, 35%
0-$15,000,000
Advantages: Separate tax entity Sale of stock to unlimited number of investors Dividend received deduction (70% rule) Limited Liability Continuity of life
Disadvantages:
Corporate formalities
Dividends pd after tax
Accumulation of earnings beyond certain limits -double taxed
**Never choose when losses are mentioned in the material!
Dividend Received Deduction 70% rule
Corporate Shareholders (companies) are allowed a deduction for dividends.
Own 20% or less -70% Exclusion
20%-80% -80% Exclusion
more than 80% -100% Exclusion
Section 1244 Small Business Stock
First million $ of stock issued after incorporation (C or S)
Loss of 100,00/ year on Jt return ($50,000 Single) considered ordinary, not capital.
Personal Service Corporation
Principal activity is performance of personal service by employee owner
Health,
Accounting and Architectural
Law
Engineering
Any income retained by a PSC is taxed at flat 35% (lose graded schedule of all other corporations)
S Corp
100 Shareholders (individuals, estates and certain trusts-US only)(husband and wife are 1) Single class S stock No preferred
Elects special tax treatment
Unanimous vote of shareholders
Taxes filed on 1120S
Eligibility:
- up to 100 shareholders
- can issue only 1 class of common stock (no preferred)
- can be voting or nonvoting
- domestic corp only
- individuals, estates and trust may be shareholders (US citizen or permanent resident alien)
Advantage:
Pass through losses
Limited Liability
Conduit of income or loss to owner, but limited to basis
Basis = cash +direct loans made by shareholder to corp
Disadvantages:
Corporate Formalities
Sale of Stock limited by eligibility
(Owner can take excessive compensation and not have if classified as dividends)
Risky business that can produce losses
unearned income passed not subject to medicare tax
If an S corporation pays accident and health insurance premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder’s wages subject to federal income tax withholding.
Tax - Partnerships LLP/LLC
Tax form 1065
- includes the return of each individual partner and income and losses
-Losses up to basis
Basis = cash contributed by partner + loans made + debt borrowed
S-Corp Tax
Loses up to Basis
Basis = cash contributed by shareholder = direct loans to S corp
S corp debt NOT included in shareholder basis
Limited Liability Tax
It treated as a partnership:
- only informational return is filed
- income passes through to individual members
If treated as corp
- business itself is taxable entity
- files form 1120 or 1120s
Corporate Accumulated Earnings Tax
penalty tax =15% of accumulated taxable income for the year
Addition to regular corporate tax
Every corp can accumulate $250k without establishing business need
Intended to coerce corps to pay dividends
A bona fide business need will allow corps to avoid the tax above $250k
Prior year Accumulated Earnings \+Income -Taxes Pd -Dividends Paid - 250K credit X.15 =CAE tax due
Distributions
Dividend - shareholder return on investment
Taxed on corporate level and to shareholders Not applicable to pass through entities -S Corp -LLC -sole proprietor
Limited Partnership
Contribution of money or property in exchange for partnership interest (not taxable)
Basis - Cash/ property contributed (carry over basis)
- distributions
- liabilities assumed by partnership
Liable to creditors only up to capital contributions
No Authority
Same as GP in that can examine books, accounting, return of contribution, assignments of rights
Same as GP
