CHAPTER 19—TAXATION OF BUSINESS FORMS AND THEIR OWNERS
Reasonable compensation paid to owners (other than sole proprietors) is deductible by the business.
Reasonable compensation paid to owners who are not proprietors are deductible business expenses.
Examples 1, 3, and 6 and pp. 19-2, 19-12, 19-20, 19-21, and 19-22).
A partnership has a $7,000 basis for proprietorship land it has just received in exchange for a 20 per-
cent capital interest. The land had a $7,000 market value and $8,200 basis to the proprietorship.
The proprietorship's $8,200 basis transfers to the partnership. This is true of all nontaxable transfers of
business assets to all four organizational forms. The $7,000, the lower of market value or basis, is the
business' basis only if the land had been a personal use asset.
Example 14, p. 19-30, and § 723
of the partnership
General partners have unlimited liability.
Capital gains of a partnership and an S corporation flow through to owners to be reported by them on
their own tax returns.
The flow-through concept generally is a significant advantage of both the partnership and S corporate
forms over the C corporate form.
Example 3; Schedule K-l at Chapter 19-3; pp. 19-5, 19-6, 19-9, and 19-14; and §§ 701, 702(b),
Reasonable compensation paid to owners (other than proprietors) qualifies as self-employment in-
Reasonable compensation paid to owners of C and S corporations does not qualify as self-employment
income, while amounts paid to general and limited partners do qualify as self-employment income.
Examples 1, 3, and 17; pp. 19-2, 19-12, 19-14, and 19-19; and § 1402
R is an employee/owner of a C corporation. Q is an employee/owner of an S corporation. Both R and
Q's salaries are deductible by the corporations they work for.