Chapter 16 Exhibit 20b S Corporation Penalty Taxes IRC 1375 Tax Example FACTS 1

Chapter 16 exhibit 20b s corporation penalty taxes

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Chapter 16, Exhibit 20b
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S Corporation Penalty Taxes— IRC 1375 Tax Example FACTS: 1. S corporation has gross receipts of $300,000 in 2011. 2. Included in the $300,000 is $100,000 of royalties. 3. Expenses directly connected with the production royalties are $30,000. 4. The S corporation has accumulated E & P from its prior life as a C corporation. Excess Net Passive Investment Income: $17,500 = {[100,000 – (25% x 300,000)] } * (70,000/100,000) Code Sec. 1375 tax: $6,125 = 35% x 17,500. SOLUTION: QUESTION: Compute the Code Sec. 1375 tax. Chapter 16, Exhibit 21
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Selecting a Business Entity Recap
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Various Business Forms square6 Business operations can be conducted in a number of different forms including rhombus6 Sole proprietorships rhombus6 Partnerships rhombus6 Trusts and estates rhombus6 S corporations rhombus6 Regular corporations (also called C corporations)
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What Entity Form Is Best for a New Business? General rules for small businesses: square6 Taxes should not be a motivator unless there are no nontax differences. square6 If no need to incorporate, generally better to be a limited liability company taxed as a partnership. square6 If there is a need to incorporate, generally better to be an S corporation. rhombus6 S corporations offer a potential to save on self- employment tax. square6 If there is a need to go public, a C corporation is usually the only choice. Chapter 16, Exhibit 1
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Sole Proprietorship square6 Not a separate taxable entity square6 Income reported on owner’s Sch. C
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Partnership square6 Separate entity, but does not pay tax rhombus6 Files information return (Form 1065) square6 Partnership ordinary business income (loss) and separately reported items are allocated to partners according to their profit and loss sharing ratios rhombus6 Each partner receives a Schedule K–1 pentastar2 Reports partner’s share of partnership ordinary business income (loss) and separately stated items rhombus6 Each partner reports these items on his or her own tax return
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S Corporation square6 Separate entity, only pays special taxes (e.g., built-in gains) rhombus6 Files information return Form 1120S square6 Similar to partnership taxation rhombus6 Ordinary business income (loss) flows through to the shareholders to be reported on their separate returns Certain items flow through to the shareholders and retain their rhombus6 separate character when reported on the shareholders’ returns. square6 The S corporation ordinary business income (loss) and the separately reported items are allocated to the shareholders according to their stock ownership interests square6 May not have no more than 100 shareholders (non-resident aliens not allowed). square6 May only issue one class of stock
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C Corporation square6 C corporations are subject to an entity-level Federal income tax which results in what is known as a double taxation effect.
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  • Fall '14
  • fabioambrosio
  • Accounting, Corporation, Limited Liability Company, C CORPORATION

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