Code Sec. 706. month of adopted FYE during past 3 years. Code Sec. 1378 Chapter 16, Exhibit 5
Yes, to Ps (except PALs do not apply if the general partner (GP) materially participates and Same as general partnership No, (except for personal holding companies or personal service corporations.) Subject to at-risk and passive activity loss (PAL) rules? General Partnerships S Corps C Corps Selecting an Entity — Tax Differences business is a non- rental activity). Chapter 16, Exhibit 3d
S corp. S/Hs allowed: 1. Individuals; 2. Estates; None S corp. S/Hs NOT allowed: 1. Nonresident aliens; 2. C corporations; 3. Partnerships. None Owner identity limits At least 2. 100 (related taxpayers can be treated as one taxpayer). No limit # Owners General Partnerships S Corps C Corps Selecting an Entity — Differences in Eligibility None Only one class of common stock. Code Sec. 1361(b)(1)(D). However, differences in voting rights among common shares are OK. None Capital structure limits 3. Qualified trusts. 4. Banks; 5. Insurance cos. Chapter 16, Exhibit 4a
Current deduction Subject to the portion of outside basis at risk No deduction N/A Current losses: General Limit Treatment of Equity Owner Current tax Current tax No tax to shareholder Undistributed income General Partnerships S Corps C Corps Selecting an Entity — Differences in Eligibility Current deduction Subject to the portion of outside basis at risk Chapter 16, Exhibit 4b Adjusted annually Adjusted annually Constant (unaffected by corporate activity) Owner’s basis: General Yes Yes (Code Sec. 1366(b)) No Is the character of income preserved?
Formation of Entities — Owner Perspective Always ordinary income. Always ordinary income. Tax treatment for services contributed in exchange for No control requirement 80% control after exchange. Control requirement for tax-free treatment: General Partnerships C and S Corporations Formation ownership. Chapter 16, Exhibit 6a
Formation of Entities — Owner Perspective Outside Basis: + AB in contributed property + Debt assumption - Debt relief The following formula applies to both tax-free and taxable exchanges: AB in corp. stock = + AB in contributed prop.; + Shareholder’s recog. gain; – FMV of boot rec’d, including What is an owner’s basis in the ownership interest? General Partnerships C and S Corporations Formation Inside Basis: + AB in contributed property debt relief that is boot; – Debt relief that is not boot; – Shareholder’s recog. loss. Chapter 16, Exhibit 6c
AB of property contributed Basis in property = (a) + (b), where, (a) = Shareholder’s AB in contributed property; (b) = Shareholder’s recognized gain (if any). What is an entity’s adjusted basis (AB) in property contributed by a new owner?