Chapter 2 - Chapter 2 Corp Tax Introduction Objectives...

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Chapter 2 – Corp Tax Introduction
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Objectives After studying this chapter, you should be able to: 1. Explain the tax advantages and disadvantages of using each of the alternative business forms. 2. Apply the check-the-box regulations as they pertain to partnerships, corporations, and trusts. 3. Determine the legal requirements for forming a corporation. 4. Explain the requirements for deferring gain or loss upon incorporation. 5. Understand the tax implications of alternative capital structures.
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Organizational Forms I. Organization Forms Available Include sole proprietorships, partnerships, C-corporations and S- corporations. A. Sole Proprietorships. A sole proprietorship is a business owned by one individual and often is selected by individuals who are beginning a new business. The income and expenses are reported on a Schedule C of Form 1040 since a sole proprietorship is not a separate tax entity. All of the business assets are owned by the proprietor. Examples C2-1 and C2- 2 illustrate the effect this will have on the amount of tax that will be paid on business income. A completed Schedule C and the related facts are included in Appendix B. These facts are used (with minor modifications) to illustrate the similarities and differences in the tax reporting process for a sole proprietorship, C corporation, partnership, and S corporation. 1. Tax Advantages. The tax advantages of doing business as a sole proprietorship are listed beginning on p. C2-2. 2. Tax Disadvantages. The tax disadvantages of operating as a sol proprietorship are listed beginning on p. C2-2.
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Organizational Forms B. Partnerships. A partnership is an unincorporated business carried on by two or more individuals or other entities. A partnership is a tax reporting, non-taxpaying entity, which acts as a conduit. All items of income, expense, gain, loss and credit flow through to the partners' tax returns. A partnership must file a Form 1065 annually. Each partner receives a Schedule K-1 (Form 1065), which provides the information that must be reported on the partner's tax return. Examples C2-3 and C2-4, p. C2-3 and C2-4, respectively, illustrate the effect of partnership income and loss on an individual partner's tax liability. Only those partnerships maintaining a fiscal year under the Sec. 444 reporting period rules must make tax payments based on the amount of income deferral. A completed Form 1065 and the related facts are included in Appendix B. A partnership can be either a general partnership or a limited partnership. In a general partnership, each partner has unlimited liability for partnership debts. In a limited partnership, at least one partner must be a general partner, and at least one partner must be a limited partner. Limited partners are liable only to the extent of their investment plus any amount that they commit to contribute to the partnership if called upon.
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More on partnerships 1. Tax Advantages. A partnership is exempt from taxation. Marginal tax rates of the
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