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Corporations, Partnerships,Estates & Trusts

1

Chapter 2

Corporations!"ntroduction and

#perating Rules

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$he %ig &icture 'slide 1 o( 2)

* +aantha -ohnson ons +ylar %aery.

/ Currently, the baery is operated as a sole proprietorship

and generates an annual operating pro(it o( 100,000.

* "n addition, the baery earns annual dividends o(5,000 (ro investing ecess oring capital

/ $hese stoc investents typically are held (or a iniu

o( three to (our onths.

* As a result o( incoe (ro other business ventures

and investents, +aantha is in the 3 arginal ta

rate bracet irrespective o( the baery.

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$he %ig &icture 'slide 2 o( 2)

* "n the past, +aantha has ithdran 50,000annually (ro the baery/ +he regards this as reasonable payent (or her services.

*+aantha has ased you about the ta conse4uenceso( conducting the business as a regular 'C)corporation./ %ased on the given in(oration, hat ould be the annual

incoe ta savings 'or cost) o( operating the baery as a

corporation* 6or purposes o( this analysis, use the 2017 ta rates and ignore anyeployent ta or state ta considerations.

* Read the chapter and (orulate your response.

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8arious %usiness 6ors

* %usiness operations can be conducted in a

nuber o( di((erent (ors including

/+ole proprietorships

/&artnerships

/$rusts and estates

/+ corporations 'also called +ubchapter + corps)

/Regular corporations 'also called C corps)

/Liited liability copanies

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+ole &roprietorship

* 9ot a separate taable entity

* "ncoe reported on oner:s +ch. C

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$he %ig &icture / ;aple 1

+ole &roprietorships

* Return to the (acts o( $he %ig &icture on p. 2

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&artnership 'slide 1 o( 2)

* +eparate entity, but does not pay ta/6iles in(oration return '6or 10=5)

* Most incoe and epense ites areaggregated in coputing the ordinary businessincoe 'loss) o( the partnership/Certain incoe and epense ites are reported

separately to the partners/e.g., "nterest and dividend incoe, long ter

capital gain, charitable contributions andinvestent epenses

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&artnership 'slide 2 o( 2)

* &artnership ordinary business incoe 'loss)

and separately reported ites are allocated to

partners according to their pro(it and loss

sharing ratios

/;ach partner receives a +chedule >/1

* Reports partner:s share o( partnership ordinary business

incoe 'loss) and separately stated ites/;ach partner reports these ites on his or her on

ta return

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+ Corporation

* +eparate entity, only pays special taes 'e.g., built

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C Corporation

* C corporations are sub?ect to an entity

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Bividends

* Bouble taation stes, in part, (ro the (act thatdividend distributions are not deductible by thecorporation

* $o alleviate soe o( the double taation e((ect,Congress reduced the ta rate applicable to dividendincoe o( individuals (or years a(ter 2002/ enerally, dividends are taed at sae arginal rate

applicable to a net capital gain* $hus, individuals otherise sub?ect to the 103 or 153 arginal ta

rate pay 03 ta on 4uali(ied dividends received

* "ndividuals sub?ect to the 25, 2D, , or 5 percent arginal ta ratespay a 153 ta on 4uali(ied dividends

* "ndividuals sub?ect to the E.=3 arginal ta rate pay a 203 ta on

4uali(ied dividends

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Medicare +urta

* %eginning in 201, F 1711 iposes a .D3 Medicare

surta on a tapayer:s net investent incoe in

ecess o( odi(ied ad?usted gross incoe o(

200,000 '250,000 i( arried (iling ?ointly)/ $hus, (or high

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Corporate "ncoe $a Rates

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9onta "ssues in +electing

;ntity 6or 'slide 1 o( )

* Liability

/+ole proprietors and soe partners have unlimited

liability(or clais against the entity

* Capital

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9onta "ssues in +electing

;ntity 6or 'slide 2 o( )

* $rans(erability

/Corporate stoc is easily sold, but partners ust

approve partnership interest trans(er

* Continuity o( li(e

/Corporations eist inde(initely

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9onta "ssues in +electing

;ntity 6or 'slide o( )

* CentraliGed anageent

/Corporate actions are governed by a board o(

directors

/&artnership operations ay be conducted by each

partner ithout approval by other partners

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Liited Liability Copanies 'LLC)

* LLCs have proli(erated since 1EDD hen "R+

ruled it ould treat 4uali(ying LLCs as

partnerships

/Ma?or nonta advantage

* Allos oners to avoid unliited liability

/Ma?or ta advantage

* Allos 4uali(ying business to be treated as apartnership (or ta purposes, thereby avoiding double

taation associated ith C corporations

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;ntity Classi(ication

&rior to 1EEH 'slide 1 o( 2)

* +oeties di((icult to deterine i( entity ill

be taed as a corporation

/"( entity has a a?ority o( corporate characteristics,

it is taed as a corporation

/Most entities have the (olloing characteristics!

* Associates

* #b?ective to carry on business and share pro(its

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;ntity Classi(ication

&rior to 1EEH 'slide 2 o( 2)

* "( entity has a a?ority o( the (olloing

relevant corporate characteristics it is treated

as a corporation!

/Continuity o( li(e

/CentraliGed anageent

/Liited liability to oners

/6ree trans(erability o( onership interests

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;ntity Classi(ication

A(ter 1EE= 'slide 1 o( 2)

* Chec

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;ntity Classi(ication

A(ter 1EE= 'slide 2 o( 2)

* Chec

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Coparison o( Corporate and "ndividual

$a $reatent 'slide 1 o( )

* +iilarities/ross "ncoe o( a corporation and individual are

very siilar

* "ncludes copensation (or services, incoe (ro tradeor business, gains (ro property, interest, dividends, etc.

* Corp tapayers are alloed (eer eclusions

* 9ontaable echange treatent is siilar

/%usiness deductions o( a corporation andindividual also are very siilar

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Coparison o( Corporate and "ndividual $a

$reatent'slide 2 o( )

* Bissiilarities

/Bi((erent ta rates apply

/All deductions o( corp are business deductions

* Corp does not calculate A"

* Corp does not deduct standard deduction, iteiGed

deductions, or personal and dependency eeptions

*Corp does not reduce casualty and the(t loss by 100statutory (loor and 103 o( A"

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Coparison o( Corporate and "ndividual $a

$reatent'slide o( )

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+peci(ic &rovisions Copared

* "n coparing the incoe taation o( individuals and

corporations the (olloing areas arrant special

discussion!

/ Accounting periods and ethods/ Capital gains and losses

/ Recapture o( depreciation

/ &assive losses

/ Charitable contributions

/ Boestic production activities deduction

/9et operating losses

/+pecial deductions available only to corporations

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Accounting &eriods and Methods'slide 1 o( 2)

* Accounting periods

/Most C corporations can use calendar year or (iscal

year ending on last day o( a calendar onth 'or 52