CHAPTER 17- Sole proprietorships- non-taxable entity separate from the individual who owns the proprietorship, the owner of a sole proprietorship reports all business income and expenses of proprietorship on Sched C of 1040. Ex if Sam has operating income of 100k but withdraws 50k, she still reports 100k regardless of withdrawal. Partnerships- not subject to federal income tax, required to file form 1065 which reports partnerships business activities. Each partner receives a Sched K-1 that reports partners share of ordinary business income and separate reported income and expenses. Ex. Jon & Bob= equal partners; business 500k of GI and 350k of expenses. They sold land for LTCG of 60k, Jon withdrew 40k and Bob 45k. Ordinary income of 500-350= 150k. Company also reports 60k LTCG. Each report 75k for business income and state LTCG of 30k on his own return. S corporations- do not pay federal income tax are similar to partnerships in that ordinary business income or loss flows through to the shareholders to be reported on separate returns and they do not aggregate all income and expense items in computing business income/loss. According to stock ownership interests. C corporations- are subject to entity level federal tax which results in a double taxation effect, it reports its income and expenses on form 1120 and computes tax on the taxable income using rate schedule to corporations. When a corporation distributes its income, the corps shareholders report dividend income on their own tax returns, therefore income taxed at a corporate level is also taxed at the shareholder level. Ex/ J Corp has T.I of 100k, it pays corp tax of 22,250 leaving 77,750 which is distributed as a dividend to single shareholder who has T.I of 68k (77,750- 5950 s.d- 3800 exemption). Looking at chart his tax is 4898 + the corps 22250 makes the combined tax 27148. If it was sole prop; 100k- 5950-3800) 90250 and pays tax of 18731 which is a savings of 8417 compared to C corps. Dividends are not deductible by the c corporation, therefore taxable to shareholders. Qualified dividend income is taxed at same preferential rate as LTCG- 15% (0 for ppl in two lower tax brackets). Tax attributes of income and expense items of a C corp do not pass through the corp entity to shareholders. Losses of a C corp are treated differently than losses of a proprietorship, partnership or S corp. Losses on propriep may be deductible by the owner, partnerships losses are passed through the partners and S corps are passed through to the shareholders, C corps have no effect on the taxable income of the shareholders. Limited liability company- qualify as partnerships it allows its owners to avoid unlimited liability which is primary non tax consideration in choosing this business. Unlimited liability is creditors of the business may file claims not only against the assets of the business but also
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