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Chapter+15+_S+Corporations_ - Chapter 15 S Corporations S...

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Chapter 15S CorporationsS Corporations
S Corporations—Treatment of Tax and NontaxMatterssquare6The Conduit Concept.For most tax matters, S corporations aretreated like partnerships. As in the partnership conduit concept,the taxable income of an S corporation flows through to theowners on a per-day and per-share basis. Income and losses arereported on Form 1120-S, allocated to each shareholder on asupporting K-1 schedule, and then transferred, via the K-1, to thesupporting K-1 schedule, and then transferred, via the K-1, to theindividual owners’ 1040 returns. There, at the individual level,income is taxed and losses are deducted.square6The Entity Concept.The character of income and losses isdetermined at the entity level, not at the shareholder level. Forexample, a long-term capital gain reported by the S corporationremains long-term to the shareholder, even if his ownership in theS corporation had been held for a short-term period.Chapter 16, Exhibit 1a
S Corporations—Basissquare6Just like partners in a partnership, the shareholders of an Scorporation are required to pay income tax on the corporation’sincome regardless of whether and when the income is distributed.square6The shareholder is essentially paying tax on money he/she is notreceiving.To ensure that the shareholder is not taxed twice on the samesquare6To ensure that the shareholder is not taxed twice on the samemoney, each time the shareholder of an S corporation pays tax onthe S corporation’s income, the shareholder’s basis increases bythe amount of income on which he/she has paid tax.square6When that income is eventually distributed, the shareholder’sbasis is decreased.Chapter 16, Exhibit 1a
square6The biggest difference between S Corporations andpartnerships is:square6Owner salaries and payroll taxes.Deductible by S corporations, not bypartnerships.square6Example 1: Joe is a lawyer and a 50% partner in partnership A.Alawyer like Joe normally earns $60,000. Partnership A had a netincome of $200,000 this year.square6Joe must pay income tax on $100,000.S Corporations vs. Partnershipssquare6Joe must pay income tax on $100,000.square6Joe must pay self employment tax on $100,000.square6The same result would have been true if Joe was a sole proprietor.square6Example 2: Joe is a lawyer and a 50% shareholder in S Corporation A.A lawyer like Joe normally earns $60,000. S Corporation A had a netincome of $200,000 this year.square6Joe must pay income tax on $100,000.square6Joe must pay self employment tax on $60,000.
square6Another difference between S Corporations and Partnerships is that SCorporations recognize gain on the distribution of appreciated property totheir shareholders, while partnerships do not.rhombus6Example: An S Corporation has five equal shareholders. On December 31,the S Corporation distributes a piece of land with a FMV of $300,000 andan AB of $200,000 to Shareholder A. At the time of the distribution,Shareholder A has a basis in the S corporation of $290,000.

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Term
Fall
Professor
fabioambrosio
Tags
Accounting, Corporation, Limited Liability Company, C CORPORATION

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