Tax Chapter 17 - Chapter 17 Corporations Introduction and...

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Chapter 17: Corporations: Introduction and Operating Rules 17.1 Tax Treatment of Various Business Forms Sole Proprietorships Not a taxable entity separate from the individual who owns it All income and expenses (regardless of amount withdrawn during the year) are reported on owner’s Schedule C, net profit/loss is then transferred to 1040 Partnerships Not subject to federal income tax, but must file Form 1065 to report business activities Most income and expenses are aggregated to calculate partnership profit/loss, but some income such as dividend income, LTCL, and some expenses such as charitable contributions are reported separately to the partners Schedule K1 reports each partner’s share of profit/loss and separately reported income/expenses items Corporations Governed by Subchapter S or Subchapter C (C Corp aka regular corp) of Internal Revenue Code S Corps similar to partnerships, P/L flows through to shareholders (certain items and expenses are reported to shareholders separately) C corporations are subject to entity-level federal income tax, results in double-taxation / income and expenses are reported on Form 1120, dividend income is reported on shareholder’s tax returns upon distribution Taxation of Dividends Dividends are not deductible by the corporation and are taxable to the shareholders resulting in double taxation Dividends taxed at same preferential rates as LTCL Comparison of Corporations and Other Forms of Doing Business Marginal rates for corps range from 15% to 39%, tax savings result when applicable rate is lower than the individual rate
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Losses have no effect on the taxable income of the shareholders State taxes apply to businesses formed as corporations Owner level income from S-crops, partnerships, and sole props is taxed at the state level as well Nontax considerations Liability protection Ability to raise money through stock ownership Shares are freely transferable Corporations have a potentially unlimited life Corporations have centralized management essential for the smooth operation of a widely held business Limited Liability Companies Treated as partnerships for tax purposes so avoids the problem of double taxation Entity Classification Corporations defined loosely by tax law: “associations, joint stock companies, and insurance companies” are included Needed are majority of characteristics: Continuity of life Centralized Management Limited Liability Free Transferability of interests IRS 1996 “Check the box regulations” enable taxpayers to choose the tax status of a business without regard to its corporate characteristics Entities with >1 owner may elect partnership or corporation status Entities with 1 owner may be sole props or corps If no box is selected, default for multiowners is partnership and sole prop for single owners 17.2 An Introduction to the Income Taxation of Corporations Similarities to Individual Taxpayers Gross income fairly similar, corporations are allowed fewer exclusions G/L from property tx handled similarly
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