Chap.10-12.BusinessEntities

Chap.10-12.BusinessEntities - Federal Income Taxation...

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Federal Income Taxation CHAPTERS 9 - 11 BUSINESS ENTITIES Business Entities Sole proprietorships Corporations Sole Proprietorships Unincorporated business owned by a single individual. Business income and expense is aggregated with individual's other income and expense. Tax liability is computed on individual's taxable income from all sources. Partnerships Conduit entity - income and expenses or losses pass through to the partners. Each partner is taxed on distributive share of income or loss and not on cash flows. Partnership itself is not a taxed entity. Guaranteed payments to partners for services rendered to partnership are deductible from partnership income and taxed to partner. However, partners are not employees of the partnership. Therefore, partners pay self-employment tax on any guaranteed payments. Basis of partner's interest Initial basis is cash plus adjusted basis of property transferred to the partnership in exchange for the ownership interest. The basis is increased by subsequent capital contributions and partner's distributive share of partnership income and reduced by distributive share of partnership losses and any distributions. Basis for loss deductions Partner's ability to deduct distributive share of partnership losses is limited to partner's basis in partnership. For this purpose, the partner's basis also includes the partner's share of partnership liabilities. Self-employment Income Income from partnerships and sole-proprietorships is subject to self-employment tax (FICA).
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Subchapter S Corporations Eligibility requirements Shareholders must be individuals, estates, or trusts. Maximum number of shareholders = 75. Single class of common stock; no preferred stock. Election Unanimous election to subchapter S status by shareholders. The election is permanent unless revoked by majority. Shareholder is taxed on distributive share of taxable income or loss (determined by Shareholder's basis in shares: Similar to partner's interest - Initial basis = cash plus the adjusted basis of any property transferred for stock. This is increased by shareholder's subsequent distributive share of taxable income and reduced by distributive share of taxable loss and dividend distributions. Salaries paid to shareholders who are also employees are deductible business expenses. Corporations What is a corporation for the federal income tax? Corporations are formed under state law in the US. In general, the incorporators (ie those setting up the corporation) must draft a corporate charter & file articles of incorporation with the appropriate state agency. The state, in turn, recognizes the corporate existence. Stock is issued & the
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Chap.10-12.BusinessEntities - Federal Income Taxation...

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