Exam 3 -Study Guide - Exam 3 Study Guide (Chapters 10, 11,...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Exam 3 Study Guide (Chapters 10, 11, 12, 13) Chapter 10 – Sole Proprietorships, Partnerships, LLCs, and S Corporations A sole proprietorship is an unincorporated entity owned by one person. This person is personally liable for business debts. If gross income exceeds deductions, it is a net profit , and a net loss occurs if deductions exceed gross income. Any net profit is carried over to the individual’s return as ordinary income and is combined with other income for the yr. If the business has a loss, it can be deducted against other income for the yr. An excess loss can be carried back 2 yrs and forward 20 yrs . If a sole proprietor uses part of his home as an office for his business, expenses related to the home office may be deductible. The home office must be used regularly and exclusively as: (1) Principal place of business, or (2) A place where he meets or deals with clients in the normal course of business. The home office deduction is limited to the taxable income of the business before the deduction. If the business has employees, the sole proprietor is an employer and must pay unemployment and payroll taxes related to these employees. The employer must pay the employer payroll tax , which includes the Social Security tax (6.2% up to $97,500) and the Medicare tax (1.45%). The employer must also withhold the employee payroll tax , which is computed just like the employer’s portion (6.2% up to $97,500 for Social Security, 1.45% for Medicare). The employer must withhold federal income tax from employees’ income. The business can deduct the salary of employees as well as unemployment taxes and the employer’s share of payroll tax because these are ordinary expenses. A sole proprietor is self-employed and does not receive a salary. He must pay the self-employment (SE) tax on business income. The SE tax includes the Social Security tax (12.4% up to $97,500) and Medicare tax (2.9%). These amounts are twice as much as the employee’s payroll tax because the sole proprietor pays the employer’s share and the employee’s share of payroll tax for his income from the business. Also, he can deduct ½ (the employer’s share) of the SE tax on his income taxes. A partnership is an unincorporated entity owned by two or more taxpayers. It can be set up as: General partnership – all partners have unlimited personal liability for the business’s debts Limited partnership – limited partners have limited liability (must have at least one general partner); limited partners cannot be actively involved in the business Limited Liability Partnership (LLP) – general partners are not personally liable for malpractice-related claims related to professional negligence by another partner, but are personally liable for other debts of the business; common for professional service businesses Initial tax basis in partnership interest = cash + adjusted basis of property transferred to the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/01/2009 for the course ACTG 6610 taught by Professor Ward during the Spring '09 term at Middle Tennessee State University.

Page1 / 5

Exam 3 -Study Guide - Exam 3 Study Guide (Chapters 10, 11,...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online