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T11F-Chp-14-1-Entity-Choice-Operations-and-Dist-2011

T11F-Chp-14-1-Entity-Choice-Operations-and-Dist-2011 -...

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1 Chapter 14 Entity Operations and Distributions- 2010 Howard Godfrey, Ph.D., CPA UNC Charlotte Copyright © 2010, Dr. Howard Godfrey Edited October 30, 2010. T10-Chp-14-1-Entity-Choice-Operations-and-Dist- 2010
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2 Proprietorship S Corporation Partnership Separate items Income reporting Recapture Net operating Loss No div. received deduction Transaction w/ ptshp Net operating Loss Basis Considerations Basis Considerations Corporation Entity Distributions Capital gains & losses Proprietorship Div. received deduction Partnership Charitable Contributions Corporation Net operating Loss S Corporation Tax Credits Tax Planning Basis Considerations Income Splitting Children-Employees Family Entities 14. Entity - Operations and Distributions
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3 Partnerships Income reporting Net operating Loss Transaction w/ partnership Basis Considerations
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Taxation of Operations The general formula for computing income tax is: Gross Income less: Deductions Taxable Income times: Tax rate (for entity) Income tax less: Tax prepayments and Tax credits Tax (refund) due with return
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Let’s concentrate on the exceptions to the general formula common to each entity.
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Sole Proprietorship Many items are reported elsewhere on the owner’s return and not reported as part of the proprietorship’s income Investment income and expense Capital gains and losses Section 1231 gains and losses Passive activity items Charitable contributions Owner’s personal expenses Tax credits Net operating losses
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Partnership Income & expenses are reported by the partners according to their ownership interests Items which would receive special treatment on a partner’s return are reported separately All items listed separately for sole proprietorships Amounts expensed under Section 179 Alternative minimum tax items Nondeductible expenses
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John Mason and his brother Bennie are equal partners in Mason Enterprises, which operates as a partnership. How would they report the income and loss items from partnership operations? John and Bennie each invested $50,000 to start Mason Enterprises. Each has a 50% interest in the partnership. During the first year, the business had the income and expenses from
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Consulting revenue $125,000 Travel expenses 40,000 Transportation 3,000 Advertising 7,000 Office expense 3,000 Telephone 1,000 Dividend Income 5,000 Interest Income 2,000 Charitable contribution 1,000 Political contribution 6,000 What is ordinary Income? Mason Enterprises
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Ordinary Consulting rev. $125,000 $125,000 Travel expenses 40,000 (40,000) Transportation 3,000 (3,000) Advertising 7,000 (7,000) Office expense 3,000 (3,000) Telephone 1,000 (1,000) Dividend Income 5,000 Interest Income 2,000 Charitable cont. 1,000 Political cont. 6,000 Ordinary Income $71,000 Mason Enterprizes
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Mason Information Form 1065 Sch- K Consult rev. $125,000 $125,000 Travel exp. 40,000 (40,000) Transport. 3,000 (3,000) Advertising 7,000 (7,000) Office exp. 3,000 (3,000) Telephone 1,000 (1,000) Dividends 5,000 5,000 Interest 2,000 2,000 Char. cont. 1,000 (1,000) Political cont. 6,000 (6,000) Ordinary Income $71,000
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Mason Information Form 1065 Sch- K Sch- K-1 Enterprizes Page 1 Both John Consult rev. $125,000 $125,000 Travel exp. 40,000 (40,000) Transport. 3,000 (3,000) Advertising 7,000 (7,000) Office exp. 3,000 (3,000) Telephone 1,000 (1,000) Dividends 5,000 5,000 2,500
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