Partnerships Chapter 11

Partnerships Chapter 11 - S Corporations 1/21/11 Chapter 11...

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Click to edit Master subtitle style 1/21/11 S Corporations Chapter 11
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1/21/11 Overview S CORPORATION PROFITS & LOSSES An S-corporation is not a taxpaying entity l Earned income not subject to two layers of federal income taxes FORM 1120S Information return l Provides IRS with information about S-corporation’s: Income Allocation to shareholders Shareholders report on individual tax return their share of: l Income l Gain and loss l Deduction l Credit items 22
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1/21/11 Problem 11-29 part d. Carl Carson, a single taxpayer, owns 100% of Delta corporation. During 2009, Delta reports $150,000 of taxable income,. Carl reports no income other than that earned from Delta. l What is Delta’s income tax liability assuming Carl withdraws none of the earnings from the S-Corporation? l What is Carl’s income tax liability? l What is the total tax liability of both Carl and the S-corp? 33
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1/21/11 Problem 11-29 Continued Assume that Delta instead distributes $80,000 of its after-tax earnings to Carl as a dividend in the current year. What is the total income tax liability for the S corporation and shareholder. Answer 44
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1/21/11 Problem 11-29(d) C. What if Carl withdrew $80,000 from the business in salary? Assume that the corporations pays $6000 of Social Security taxes on the salary which it can deduct from the $150,000 income. 55
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1/21/11 Should an S Election Be Made? ADVANTAGES OF S CORPORATION TREATMENT One level of taxation (no corporate tax) l Losses can flow through to shareholders and offset other income l Undistributed income that has already been taxed is not taxed when distributed l Separately stated items retain character when they flow through: Capital gains and dividends Tax-exempt income l Separately stated items may be used by individual shareholders: Deductions and losses Tax credits l Possible to split income among family as long as everyone compensated for: Services Capital l Earnings that flow through are not subject to self-employment tax 66
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1/21/11 Should an S Election Be Made? DISADVANTAGES OF S CORPORATION TREATMENT C corporation is treated as separate tax entity from shareholders Corporate rates are generally lower than individual rates C corporations that retain earnings in business may reduce tax burden First $50,000 taxed at 15% rate l Earnings are taxed to individuals even without distribution l Subject to excess net passive income tax and built-in gains tax Partnerships are not l Dividends received by S corporation are not eligible for DRD l Allocation of income and loss items is based on stock owned each day Special allocations are not allowed l Shareholders subject to at-risk, passive activity, and hobby loss rules l Restriction in # and type of shareholders and type of capital structure l Must generally use a calendar year as tax year 77
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1/21/11 S Corporation Requirements Must be: l Domestic corporation, or l Unincorporated entity that elects corporation treatment (check the box regulations)
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This note was uploaded on 01/20/2011 for the course ACC 617 taught by Professor Staff during the Fall '08 term at Kentucky.

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Partnerships Chapter 11 - S Corporations 1/21/11 Chapter 11...

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