Unformatted text preview: CCH Essentials of Federal Income Taxation Chapter 15 Chapter Partnerships and S Corporations ©2009 CCH. All Rights Reserved. 4025 West Peterson Ave. Chicago, IL 60646-6085 Partnership
A partnership is an association of two or more persons who conduct business with an intent to share profits or losses. Each person contributing property or services to the partnership receives an ownership interest. Each person becomes a partner. Partners can be individuals, corporations, estates, partnerships, or trusts. partnerships,
Chapter 15 CCH Essentials of Federal Income Taxation 2 of 14 Partnership Required Tax Year
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A partnership’s required tax year is that of its partnership’s partners that own more than 50% of the partnerships capital and profits (majority partners rule). capital If a majority of the partners do not have the same tax If year, the required tax year is the year end of all of its all principal partners (principal partners rule). principal If all principal partners do not have the same tax If year, then the partnership’s required tax year is determined under the least aggregate deferral method. method
CCH Essentials of Federal Income Taxation 3 of 14 Chapter 15 Reporting Partnership Income Reporting and Deductions and
A partnership is not a taxable entity. A partnership passes through income and passes expenses to the individual partners. expenses Chapter 15 CCH Essentials of Federal Income Taxation 4 of 14 Partnership Ordinary Income
Gross receipts or gross sales Less returns and allowances Less cost of goods sold Gross profit Ordinary income or (loss) from other partnerships and fiduciaries Net farm profit or (loss) Net ordinary gain or (loss) from Form 4797 Other income or (loss) Total income or (loss) Less: Allowable operating expenses Guaranteed payments Ordinary income or (loss) from trade or business
Chapter 15 CCH Essentials of Federal Income Taxation $xx xx $xx xx $xx xx xx xx xx $xx $xx xx xx $xx
5 of 14 Examples of Separately Stated Items
• Rental income • Interest income • Dividend income • Royalty income • Short-term capital gains Short-term • • • • • • Section 179 deductions • Portfolio expenses • Credits and credit recaptures • Self-employment earnings • AMT adjustments and AMT • • • •
preferences preferences Foreign taxes Tax-exempt income Nondeductible expenses Personal expenses paid for Personal partners partners (losses) (losses) Long-term capital gains Long-term (losses) (losses) Other portfolio income Guaranteed payments* Section 1231 gains Charitable contributions * Deducted in total in computing ordinary income but separately stated for each partner.
Chapter 15 CCH Essentials of Federal Income Taxation 6 of 14 Limited Liability Company
Limited liability companies (LLCs) provide the owners with the limited personal liability of a corporation but are partnerships for tax purposes. The reason they receive partnership tax treatment is that they tend to lack the corporate characteristics of continuity of life and free transferability of interests. and
Chapter 15 CCH Essentials of Federal Income Taxation 7 of 14 S Corporation
To be an S corporation, the entity must have small business corporation status, which involves: • • • • Being a domestic corporation Having only one class of stock outstanding Having no more than 100 shareholders Limiting its shareholders to individuals (other than Limiting nonresident aliens), estates, and certain trusts nonresident Chapter 15 CCH Essentials of Federal Income Taxation 8 of 14 Electing S Status
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In order to be taxed as an S corporation, all of the effected shareholders must elect to be taxed as an S corporation. An valid election made during the first 2½ months of the corporation’s tax year normally will take effect retroactive back to the first of the year. A valid election made after the first 2½ months of the corporation’s tax year will be effective on the first day of the following tax year.
CCH Essentials of Federal Income Taxation 9 of 14 Chapter 15 Automatic Termination of an S Election
S corporation status terminates automatically if one of the following events occurs during the year: • • The corporation fails to meet any of the The – requirements for being an S corporation. requirements A former C corporation that has accumulated former earnings and profits carried over from its years as a C corporation AND has passive investment income in excess of 25% of its gross receipts for three consecutive years.
CCH Essentials of Federal Income Taxation 10 of 14 Chapter 15 Voluntary Termination of an S Election
S corporation status terminates if over half of its shareholders elect to revoke the corporation’s S election. A former C corporation – has accumulated that former earnings and profits carried over from its years as a C corporation and has passive investment and income in excess of 25% of its gross receipts for three consecutive years. Chapter 15 CCH Essentials of Federal Income Taxation 11 of 14 S Corporation Returns
The character of all items of income, deductions, losses, and credits passes through from the corporation to the shareholders in a manner similar to partnerships. manner Chapter 15 CCH Essentials of Federal Income Taxation 12 of 14 Examples of Separately Stated Items
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Charitable contributions Tax-exempt income and Tax-exempt nondeductible expenses nondeductible Foreign taxes Investment expenses Personal expenses paid for Personal shareholder’s benefit shareholder’s Net income (loss) from Net rental real estate activities rental • • • • • • Capital gains (losses) Portfolio income (loss) Section 179 expenses Section deduction deduction Section 1231 gains (losses) Tax credits Tax preferences and Tax adjustments related to the AMT AMT Chapter 15 CCH Essentials of Federal Income Taxation 13 of 14 Transactions between S Transactions Corporations and Shareholders Corporations
Shareholders adjust their initial basis in S corporation stock by the following: • • • • Ordinary income (loss) Separately stated items Additional contributions to the S corporation Distributions from the S corporation Chapter 15 CCH Essentials of Federal Income Taxation 14 of 14 ...
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