Chapter 2 Flashcards
(38 cards)
Sole Propriortship
Not a separate taxable entity form the individual who owns the propriortship
What form does a sole propriertship report all its business income and expenses on?
Schedule C of form 1040
Does a proprietor report all profits regardless of what was withdrawn?
YES! - taxable!
Partnerships - subject to Federal Income Tax?
No!
What form is a partnership required to fill out?
A partnership is required to file Form 1065, which reports the results of the partnership’s business activities
Can some partnership items be reported separately?
Yes - Interest Income, Dividend Income and Long term capital gain. Not aggregated in businesses ordinary income or loss.
How are the partnerships income and losses and separately reported items allocated?
Allocated based on P&L agreement.
What form does each partner separately report its profits and losses earnings on?
Schedule k-1, reports on his or her own tax return
What are C corporations governed by?
Subchapter C of the Internal Revenue Code
C Corporations
“regular corporations”,
S Corporations,
generally do not pay Federal Income Tax, governed by Schedule S
S Corporations are similar to partnerships how?
are similar to partnerships in that ordinary business income (loss) flows through to the shareholders to be reported on their separate returns
S corporations are also similar to partnerships regarding the flowthrough of certain items how?
Certain items flow through to the shareholders and retain their separate character when reported on the shareholders’ returns
Are C Corporations subject to an entity level Federal Income Tax?
Yes!
Double Taxation Effect
C Corporations, taxed Federally and then any dividend income is taxed for shareholders as well. “A C corporation reports its income and expenses on Form 1120. The corporation computes tax on the taxable income reported on the Form 1120 using the rate schedule applicable to corporations. When a corporation distributes its income, the corporation’s shareholders report dividend income on their own tax returns. Thus, income that has already been taxed at the corporate level is also taxed at the shareholder level.
Are dividend distributions deductible by corporations?
No
What are the tax rates for dividend distributions?
current tax rate applicable to qualified dividend income (and long-term capital gains) is 15 percent or, for taxpayers in the 39.6 percent marginal tax bracket, 20 percent (0 percent for taxpayers in the 10 or 15 percent marginal tax bracket)
What kind of liability issues do sole proprietorships and partnerships face?
Unlimited Liability - Sole proprietors and general partners in partnerships face the danger of unlimited liability. Creditors of the business may file claims not only against the assets of the business but also against the personal assets of proprietors or general partners. State corporate law protects shareholders from claims against their personal assets for corporate debts.
What is the continuity of life advantage?
Shareholders may come and go, but a corporation can continue to exist. Death or withdrawal of a partner, on the other hand, may terminate the existing partnership and cause financial difficulties that result in dissolution of the entity
What factors have increased Limited Liability Company’s presence in the more recent years?
1988 when the IRS first ruled that it would treat qualifying LLCs as partnerships for tax purposes
What are some advantages of LLC’s?
Owners are do not have unlimited liability exposure, the avoidance of double taxation as LLC’s are treated as partnerships and proprietorships for tax purposes, do not generally pay federal income tax
Relevant Characteristics of Corporations
Continuity of life.
Centralized management.
Limited liability.
Free transferability of interests
Check the Box Regulations
The Regulations enable taxpayers to choose the tax status of a business entity without regard to its corporate (or noncorporate) characteristics.
Check Te Box Regulations Classifications
Under the check-the-box Regulations, an unincorporated entity with more than one owner is, by default, classified as a partnership. An unincorporated entity with only one owner is, by default, classified as a disregarded entity (or DRE). A DRE is treated as a sole proprietorship if it is owned by an individual taxpayer or as a branch or a division of a corporate owner. If the entity wants to use its default status, it simply files the appropriate tax return. If it wants to use a different status or change its status, it does so by “checking a box” on Form 8832. Thus, an LLC (single or multi-member) can choose to be taxed as a C corporation and, if it otherwise qualifies, even elect S corporation status.
