Unit 1: Business Entitles & Requirements Flashcards
Can a sole proprietorship have more than one owner?
No, it must be owned by a single person.
A sole proprietorship can have multiple employees though.
Can a sole proprietorship’s ownership be passed onto a new owner?
No, if the business is sold, the new owner must operate under a different sole proprietorship or a different type of entity.
*Sole proprietorships are tied directly to an individual taxpayer.
Do partnerships have to pay income taxes?
No, but they are required to report any income, deductions, gains, or losses from its operation.
In the event that a partnership is audited and found to have underreported its income, who is responsible for paying the income tax?
The partnership itself. This is also known as the “Centralized Partnership Audit Regime” (CPAR)
Requirements for a partnership to elect out of CPAR:
- Must have 100 or fewer partners during the year
- Hos only “Eligible” partners which include
- Individuals (Natural persons only)
- C Corporations or foreign entities classified as corporations
- S corporations
- Estates of deceased partners
In a CPAR, does the partnership representative have to be a partner?
No, the representative can be either an individual or a business entity and must have a substantial presence in the United States
In a CPAR, what does the partnership representative do?
They have the authority to make decisions for the partnership during the course of an audit, and decisions made by the representative are binding on the partnership and all of its partners
How many partners can a single partnership have?
An unlimited amount
1065
A partnership annual tax return
K-1
Given to each partner of a partnership. It shows the income and losses allocated to each partner
Limited Partnership: how is it created
LPs are created at the state level
- You a required to obtain a Certificate of Limited Partnership or Certificate of Formation which must generally be filed with the Secretary of State where the partnership chooses to do business.
What is an LLP?
Limited Liability Partnership
- LLP is an entity that is formed under state law and is generally used for specific professional services, such as those offered by a law firm or CPA firm.
In a LLP, what partners are allowed to actively participate?
All partners actively participate in management affairs but are provided limited liability protection.
LLP: What are the partners liable for?
A partner in a LLP generally would not be personally liable for the partnership debts or the malpractice of other partners. They would only be at risk for their own malpractice and/or interest in the partnership’s assets.
If both spouses materially participate as the only members of a jointly owned and operated business, the business may be treated as:
Qualified Joint Venture (QVJ)
What is the main filing benefit of a QJV?
It allows a married couple to avoid the complexity of filing a partnership return but still allows each spouse to take credit for self-employment earnings from the business for Social Security purposes
QJV: How are business items reported and how do taxes flow to partners?
- Items of business income, gain, loss deduction, and credit are split between the spouses in accordance with their respective interests in the business.
- Spouses then file separate Schedules C and separate Schedules SE.
QVJ: Can spouses use MFS?
No, you must MFJ to qualify
Are state-approved entities (such as LLCs) allowed to file as qualified joint ventures?
No
QVJ: What is the narrow exception that allows a state-approved entity to file as a qualified joint venture?
Married couples who co-own and operate an MMLLC (multi-member LLC) in a community property state may still file on two Schedules C, as long as they agree to file a joint return.
Are QVJs required to file a 1065?
No, both spouses directly report on their Schedules C
Are MMLLCs required to file a 1065?
Yes
What is the main difference between C & S corporations? (General answer)
How they are taxed
How many shareholders can a C corporation have?
An unlimited amount
1120
Used by a C corporation to file an annual tax return. It’s used to report its net income and losses and pay tax on its income.
Does a C corporation receive a tax deduction when it distributes dividends to shareholders?
No
Can shareholders of a C corporation deduct any losses from the corporation?
No
What rate are C corporations taxed at?
A flat 21% rate, regardless of their size or business activity.
Are C corporations subject to AMT?
No, the TCJA permanently repealed the corporate alternative minimum tax.
How is a S corporation taxed?
They are generally not subject to tax; instead, their income, losses, deductions, and credits are passed through directly to their shareholders in a manner similar to a partnership.
Is an S corporation itself responsible for income tax on certain built-in gains and passive investment income?
Yes, but it’s not common.
1120-S
Annual income tax return used by S corporations to report its income or loss.
Do S corps use a K-1?
Yes, to report each shareholder’s applicable share of income or losses.
What is special about S corporations?
Because shareholders report pass-through income or loss on their individual tax returns, the shareholders of S corporations are able to avoid double federal taxation on their corporate income.
S corporations must meet the following requirements
- Be a domestic corporation
- Have only “permitted” shareholders (partnerships, C corporations, and nonresident aliens are not eligible)
- Have no more than 100 shareholders
- Have only one class of stock (voting and nonvoting stock are not considered to be separate classes of stock, as long as they have identical rights to distribution and liquidation proceeds)
- Not be ineligible type of corporation (certain financial institutions, insurance companies, and domestic international sales corporations are not eligible for S corporation status)
Depending upon whether is has a single owner or multiple owners, an LLC will be treated for federal tax purposes either as:
- A “disregarded entity”
- A corporation; if the entity elects to be treated as such
- As a partnership
How is an LLC different from a standard partnership?
Unlike a partnership, none of the members of an LLC are personally liable for its debts
If an MMLCC is treated as a partnership for tax purposes, it must file what form annually, and who is required to sign?
1065; and only one of the members is required to sign.
What is a PLLC
“Professional Service Limited Liability Company”
- Is a type of LLC that is owned and operated by licensed professionals, such as doctors, lawyers, engineers, and CPAs
What determines if a business qualifies as a farming business?
The nature of the activity, and not the type of entity they use.
Farming businesses operating as sole proprietorships report income and loss on:
Schedule F “Profit or Loss from Farming”
What types of entities can a nonprofit be organized as?
- Corporations
- Trusts
- Unincorporated associations
What types of entities can a nonprofit never be organized as?
- Partnership
- Sole proprietorship
1023
“Application for Recognition of Exemption”
- Used by most charitable organizations to request tax-exempt status. However, churches, including synagogues, temples, and mosques, are treated as tax-exempt by default and do not have to apply for formal exemption.
990
“Return of Organization Exempt from Income Tax”
- Used by most tax-exempt organizations to report income and losses
- Must be filed annually
- Informational only
Alternatives to filing a 990
- 990-EZ
or
- 990-N (e-Postcard)
990-T
Used to tax a nonprofit for an unrelated business income
8832
“Entity Classification Election”
Allows certain business entities to choose how they will be classified for tax purposes
What is a “disregarded entity”
“Not being separate from its owner for income tax purposes”
Think single-owner LLC
2553
Used by an LLC that wishes to be taxed as an S corporation)
Entity classification timeline
- Can not take effect more than 75 days prior to the date the election was filed
- Can not take effect later than 12 months after the date the elections if filed
Once a business entity makes an election to change its classification, it generally cannot change the election again within how many years
5 (60 months)
Generally, a business must keep tax records for at least how long?
Three years from when a tax return was due or was filed, whichever is later.
Generally, a business must keep employment records for at least how long?
4 years
Generally, a business must keep records relating to property until:
The statute of limitations expires for the year in which the property is sold or otherwise disposed of.
What is a “Income Statement”
Is also called the “profit and loss” statement.
It indicates the business’s revenue, expenses, and net income or loss during a period, such as a month, quarter, or fiscal or calendar year
What is a “Balance Sheet”
Is a summary of a business’s assets, liabilities, and equity on a specific date, such as at the end of its fiscal year. It provides a snapshot of the business’s financial condition.
A business must apply for an EIN if any of the following apply
- The business pays employees
- The entity operates as a corporation, exempt organization, trust, estate, or partnership
- The business files any of these tax returns
- Employment taxes (payroll taxes)
- Excise tax
- Alcohol, tobacco, and firearms - The business withholds taxes paid to a nonresident alien
- The business establishes a pension,l profit-sharing, or retirement plan
A new EIN is required for any of the following changes
- When a sole proprietor or partnership decides to incorporate, or when a sole propretor takes on a partner and becomes a partnership
- When a partnership become a sole proprietorship
- When a sole proprietor files for bankruptcy under chapter 7 or 11
- When a taxpayer terminates one partnership and begins another partnership
- TheWhen a business establishes a pension, profit-sharing, or retirement plan
- The individual owner dies, and the business is taken over the the estate (in this case, the new EIN would be the EIN of the estate)
A business does not need to apply for a new EIN in any of the following instances:
- Merely to change the name or address of a business
- To change the location or add more business locations
- If a sole proprietor operates multiple businesses (including stores or branches of the same business)
How long does a business have to give out a W-2 to employees
No later than January 31 of the following year
Entities that file more than 250 returns (W-2s, and/or 1099 Forms) during a calendar year must:
File electronically
What types of transactions should be included on a 1099-NEC
Cash, check, ACH transfer, or other direct means
What types of transactions should be included on a 1099-K
Credit card payments, including third-party network transactions
1099-A
Used to report an acquisition or abandonment of secured property
1099-PATR
Taxable distributions received from cooperatives
8300: What is it?
“Report of Cash Payments over $10,000 Received in a Trade or Business”
Must be filed within 15 days after a business receives a cash payment of more than $10,000 from one transaction (or two or more related transactions”
8300: When must the business send a written statement to the customer?
No later than January 31of the following year
What are the 4 classifications of employees?
- Independent Contractor
- Employee
- Statutory employee
- Statutory nonemployee
Three characteristics determine the relationship between a business and the workers it pays for services:
- Behavioral control: Does the business have the right to direct or control how the work is done?
- Financial Control: Does the business have the right to direct or control how the worker is paid, whether expenses are reimbursed, and whether tools and supplies are provided?
- Type of relationship: How the business and worker perceive their relationship, such as whether there are written contracts or employee-type benefits, such as vacation pay or a retirement plan
SS-8
“Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”
- Filed by either the business or employee to determine how an employee should be classified
If a business does not request an SS number or a taxpayer identification number for a payee, it must withhold federal income taxes at what rate?
24%
U.S. source income received by a foreign person (a nonresident alien) is subject to a withholding rate of 30% unless a lower tax treated rate applies.
Where do statutory employees report their income?
Even though they receive a W-2 from their employer, they still report all income, and allowable expenses on their Schedule C
Examples of statutory employees:
- Full-time life insurance salespeople
- Traveling salespeople
- Certain commissioned truck drivers, if they distribute meat products, vegetable products, bakery items, or drinks (other than milk) or pick up and deliver laundry or dry-cleaning for a specific business
- Certain home workers who perform work on materials or goods furnished by the employer
Do statutory employees have to file an SE?
No, because SS and Medicare taxes are already withheld and remitted to the IRS by their employer.
Statutory nonemployees: they are treated as such if:
- Payments for their services are directly related to sales, rather than to the number of hours worked
- Services are performed under a written contract providing that they will not be treated as employees for federal tax purposes
- Companion sitters who are not employees of a companion sitting placement service are generally treated as SE, unless the individual for whom the services are performed has the right to direct and control the sitter.
Compensation for a statutory nonemployee is reported on:
1099-NEC
If a child works for their payment and they are under the age of 18, what taxes are the child’s wages subject to?
- If the business is a partnership or sole proprietorship, the wages are only subject to income tax (not FICA)
- If the business is a corporation, then the income would be subject to normal payroll taxes
Employers must report federal income taxes withheld and employment taxes on which forms
941 “Employer’s Quarterly Federal Tax Return”
or
944 “Employer’s Annual Federal Tax Return”
Who pays FUTA tax and how much is it?
FUTA is paid only by the employer and is taxed at a flat rate of 6% on the first $7,000 of each employee’s wages
What is FUTA?
Federal Unemployment Tax Act
Where is FUTA reported?
940 “Employer’s Annual Federal Unemployment (FUTA) Tax Return
If a company paid FUTA on an employee and then they quit, must they pay FUTA on the newly hired employee?
Yes
What is TFRP
Trust Fund Recovery Penalty
It is a penalty against businesses when they do not deposit trust fund taxes in a timely manner
TRFP: may be asses against any person who:
- Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes
and
- Willfully fails to collect or pay them
For the IRS to determine that an individual willfully failed to pay the required taxes, the responsible person:
- Must have, or should have, been aware of the outstanding taxes
- Intentionally disregarded the law or been plainly indifferent to its requirements (no evil intent or bad motive is required)
TRFP: how much is the penalty?
100% of the non-remitted funds
