Chapter 13 <ul><li>Comparative Forms </li></ul><ul><li>of Doing Business </li></ul>Copyright ©2010 Cengage Learning Corpor...
Choice of Form of  Business Entity <ul><li>Many factors affect the choice of business entity </li></ul><ul><ul><li>Both ta...
Principal Forms of  Doing Business <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>C corporati...
Limited Liability Company (LLC) <ul><li>Hybrid business form that combines the corporate characteristic of limited liabili...
Filing Requirements <ul><li>Sole Proprietorship </li></ul><ul><li>Files Schedule C, </li></ul><ul><li>Form 1040 </li></ul>...
Nontax Factors— Capital Formation <ul><li>Sole Proprietorship </li></ul><ul><li>Limited ability to raise capital  </li></u...
Nontax Factors— Limited Liability <ul><li>Sole Proprietorship </li></ul><ul><li>Unlimited liability </li></ul><ul><li>Part...
Other Nontax Factors <ul><li>Estimated life of business </li></ul><ul><li>Number of owners and their roles in management o...
Single vs. Double Taxation <ul><li>Sole Proprietorship </li></ul><ul><li>Single taxation </li></ul><ul><li>Partnership and...
Alternative Minimum Tax <ul><li>Sole Proprietorship </li></ul><ul><li>Directly subject to AMT </li></ul><ul><li>Partnershi...
Controlling the Entity Tax <ul><li>Various techniques can be used to control the tax liability, whether imposed on the ent...
Fringe Benefits  (slide 1 of 2) <ul><li>Generally produce the following tax consequences: </li></ul><ul><ul><li>Deductible...
Fringe Benefits  (slide 2 of 2) <ul><li>Favorable tax treatment of fringe benefits is available only to  employees </li></...
Minimizing Double Taxation  of C Corporations  (slide 1 of 5) <ul><li>Several techniques are available for reducing the do...
Minimizing Double Taxation  of C Corporations  (slide 2 of 5) <ul><li>Deductible distributions include: </li></ul><ul><ul>...
Minimizing Double Taxation  of C Corporations  (slide 3 of 5) <ul><li>Retain earnings at corporate level </li></ul><ul><ul...
Minimizing Double Taxation  of C Corporations  (slide 4 of 5) <ul><li>Make return of capital distributions </li></ul><ul><...
Minimizing Double Taxation  of C Corporations  (slide 5 of 5) <ul><li>Electing S corp status </li></ul><ul><ul><li>General...
Entity Formation  (slide 1 of 2) <ul><li>Generally, owners make contributions of cash and property to entity in exchange f...
Entity Formation  (slide 2 of 2) <ul><li>If FMV of property contributed > adjusted basis, may want to make special allocat...
Basis Considerations <ul><li>Sole Proprietorship </li></ul><ul><li>N/A </li></ul><ul><li>Partnership and LLC </li></ul><ul...
Distributions <ul><li>Distributions can be made to partners, LLC owners, or S corp. shareholders tax-free </li></ul><ul><u...
Passive Activity Losses  (slide 1 of 2) <ul><li>Loss limits apply to owners of partnerships, LLCs, and S corps </li></ul><...
Passive Activity Losses  (slide 2 of 2) <ul><li>For corporations, only apply if a closely held corp or a personal service ...
At-Risk Rules <ul><li>At-risk rules apply to: </li></ul><ul><ul><li>Partnerships </li></ul></ul><ul><ul><li>LLCs </li></ul...
Special Allocations <ul><li>Partnership and LLCs  have many opportunities to use special allocations </li></ul><ul><ul><li...
Disposition of a Business or  an Ownership Interest <ul><li>Disposing of a business may be viewed as either: </li></ul><ul...
Sale of Assets by Entity  —Seller’s Issues  (slide 1 of 3) <ul><li>Sole Proprietorship </li></ul><ul><ul><li>Treated as a ...
Sale of Assets by Entity  —Seller’s Issues  (slide 2 of 3) <ul><li>Partnership, LLC, or S Corp—Same as proprietorship </li...
Sale of Assets by Entity  —Seller’s Issues  (slide 3 of 3) <ul><li>C Corp—double taxation occurs </li></ul><ul><ul><li>Gai...
Liquidating Distribution of Assets to  Owner Followed by Owner’s Sale to  Third Party   (slide 1 of 3) <ul><li>Partnership...
Liquidating Distribution of Assets to  Owner Followed by Owner’s Sale to  Third Party  (slide 2 of 3) <ul><li>S Corp </li>...
Liquidating Distribution of Assets to  Owner Followed by Owner’s Sale to  Third Party  (slide 3 of 3) <ul><li>C Corp </li>...
Purchase of Business Assets—Buyer’s Issues  (slide 1 of 2) <ul><li>The purchaser of individual assets is not generally aff...
Purchase of Business Assets—Buyer’s Issues  (slide 2 of 2) <ul><li>Asset cost is recovered through depreciation, amortizat...
Sale of Business Interest—Seller’s Issues  (slide 1 of 3) <ul><li>Sole Proprietorship </li></ul><ul><ul><li>No distinction...
Sale of Business Interest—Seller’s Issues  (slide 2 of 3) <ul><li>S Corp </li></ul><ul><ul><li>Sale treated as sale of sto...
Sale of Business Interest— Seller’s Issues   (slide 3 of 3) <ul><li>C Corp </li></ul><ul><ul><li>Sale treated as sale of s...
Purchase of Business Interest—Buyer’s Issues  (slide 1 of 3) <ul><li>If the purchaser acquires an interest in one of these...
Purchase of Business Interest—Buyer’s Issues  (slide 2 of 3) <ul><li>Partnership </li></ul><ul><ul><li>Purchaser buys part...
Purchase of Business Interest—Buyer’s Issues  (slide 3 of 3) <ul><li>S Corp or C Corp </li></ul><ul><ul><li>Purchaser buys...
Tax Attributes of Different Business Forms  (slide 1 of 19) <ul><li>  Maximum Max Tax   Tax </li></ul><ul><li>  # Owners  ...
Tax Attributes of Different  Business Forms  (slide 2 of 19) <ul><li>  Maximum   Max Tax   Tax  </li></ul><ul><li>  # Owne...
Tax Attributes of Different Business Forms  (slide 3 of 19) <ul><li>  Tax Year   Timing of   Income </li></ul><ul><li>  Al...
Tax Attributes of Different Business Forms  (slide 4 of 19) <ul><li>    Tax Year  Timing of   Income </li></ul><ul><li>  A...
Tax Attributes of Different Business Forms  (slide 5 of 19) <ul><li>  Contribution of Character of Income </li></ul><ul><l...
Tax Attributes of Different Business Forms  (slide 6 of 19) <ul><li>  Contribution of Character of Income  </li></ul><ul><...
Tax Attributes of Different Business Forms  (slide 7 of 19) <ul><li>Loss Allocation Limitation on Loss </li></ul><ul><li> ...
Tax Attributes of Different Business Forms  (slide 8 of 19) <ul><li>Loss Allocation   Limitation on Loss </li></ul><ul><li...
Tax Attributes of Different Business Forms  (slide 9 of 19) <ul><li>At-risk Rules   Passive Loss Rules </li></ul><ul><li> ...
Tax Attributes of Different Business Forms  (slide 10 of 19) <ul><li>  At- risk Rules  Passive Loss Rules </li></ul><ul><l...
Tax Attributes of Different Business Forms  (slide 11 of 19) <ul><li>  Capital Gains   Capital Losses  . </li></ul><ul><li...
Tax Attributes of Different Business Forms  (slide 12 of 19) <ul><li>  Consequence of   Treatment of </li></ul><ul><li>Ear...
Tax Attributes of Different Business Forms  (slide 13 of 19) <ul><li>  Consequence   Treatment of </li></ul><ul><li>  Of E...
Tax Attributes of Different Business Forms  (slide 14 of 19) <ul><li>  Sale of Ownership Interest  . </li></ul><ul><li>Sol...
Tax Attributes of Different Business Forms  (slide 15 of 19) <ul><li>  Sale of Ownership Interest  . </li></ul><ul><li>S C...
Tax Attributes of Different Business Forms  (slide 16 of 19) <ul><li>  Fringe Benefits  §1244  Built-in </li></ul><ul><li>...
Tax Attributes of Different Business Forms  (slide 17 of 19) <ul><li>  §1231 Gains   Foreign Tax </li></ul><ul><li>    and...
Tax Attributes of Different Business Forms  (slide 18 of 19) <ul><li>  Tax  </li></ul><ul><li>  Alternative   ACE   Prefer...
Tax Attributes of Different Business Forms  (slide 19 of 19) <ul><li>  Tax  </li></ul><ul><li>  Alternative   ACE Preferen...
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Chapter 13

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Chapter 13

  1. 1. Chapter 13 <ul><li>Comparative Forms </li></ul><ul><li>of Doing Business </li></ul>Copyright ©2010 Cengage Learning Corporations, Partnerships, Estates & Trusts
  2. 2. Choice of Form of Business Entity <ul><li>Many factors affect the choice of business entity </li></ul><ul><ul><li>Both tax and nontax </li></ul></ul><ul><ul><li>Understanding the comparative tax consequences related to the different types of entities is important for effective tax planning </li></ul></ul>
  3. 3. Principal Forms of Doing Business <ul><li>Sole Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>C corporation </li></ul><ul><li>S corporation </li></ul><ul><li>Limited liability company (LLC) </li></ul>
  4. 4. Limited Liability Company (LLC) <ul><li>Hybrid business form that combines the corporate characteristic of limited liability for owners with tax characteristics of a partnership </li></ul>
  5. 5. Filing Requirements <ul><li>Sole Proprietorship </li></ul><ul><li>Files Schedule C, </li></ul><ul><li>Form 1040 </li></ul><ul><li>Partnership & LLC </li></ul><ul><li>Files Form 1065 </li></ul><ul><li>C Corporation </li></ul><ul><ul><li>Files Form 1120 </li></ul></ul><ul><li>S Corporation </li></ul><ul><li>Files Form 1120S </li></ul>
  6. 6. Nontax Factors— Capital Formation <ul><li>Sole Proprietorship </li></ul><ul><li>Limited ability to raise capital </li></ul><ul><li>Partnership </li></ul><ul><li>Can raise funds through pooling of owner resources </li></ul><ul><li>Ltd. p’ship can raise capital from investors </li></ul><ul><li>C Corporation </li></ul><ul><li>Greatest ease and potential for raising capital </li></ul><ul><li>S Corporation </li></ul><ul><li>Greatest ease and potential for raising capital, but limited number of investors </li></ul>
  7. 7. Nontax Factors— Limited Liability <ul><li>Sole Proprietorship </li></ul><ul><li>Unlimited liability </li></ul><ul><li>Partnership </li></ul><ul><li>General partners are jointly and severally liable </li></ul><ul><li>Ltd. partners’ liability is limited to investment </li></ul><ul><li>C Corporation </li></ul><ul><li>Generally have limited liability </li></ul><ul><li>S Corporation </li></ul><ul><li>Generally have limited liability </li></ul>
  8. 8. Other Nontax Factors <ul><li>Estimated life of business </li></ul><ul><li>Number of owners and their roles in management of the business </li></ul><ul><li>Freedom of choice in transferring ownership interests </li></ul><ul><li>Organizational formality and related costs </li></ul>
  9. 9. Single vs. Double Taxation <ul><li>Sole Proprietorship </li></ul><ul><li>Single taxation </li></ul><ul><li>Partnership and LLC </li></ul><ul><li>Single taxation </li></ul><ul><li>C Corporation </li></ul><ul><li>Double taxation </li></ul><ul><li>S Corporation </li></ul><ul><li>Generally, single taxation </li></ul><ul><li>May be subject to built-in gains tax and passive investment income tax </li></ul>
  10. 10. Alternative Minimum Tax <ul><li>Sole Proprietorship </li></ul><ul><li>Directly subject to AMT </li></ul><ul><li>Partnership and LLC </li></ul><ul><li>Indirectly subject to AMT </li></ul><ul><li>AMT adjustments & preferences flow through and partners subject to AMT </li></ul><ul><li>C Corporation </li></ul><ul><li>Directly subject to AMT </li></ul><ul><li>May have advantage here since corp AMT rate is only 20% </li></ul><ul><li>S Corporation </li></ul><ul><li>Indirectly subject to AMT </li></ul><ul><li>AMT adjustments & preferences flow through and S/H’s subject to AMT </li></ul>
  11. 11. Controlling the Entity Tax <ul><li>Various techniques can be used to control the tax liability, whether imposed on the entity or owners, such as: </li></ul><ul><ul><li>Distribution policy </li></ul></ul><ul><ul><li>Recognizing the interaction between the regular tax liability and the AMT liability </li></ul></ul><ul><ul><li>Utilization of special allocations </li></ul></ul><ul><ul><li>Fringe benefits </li></ul></ul><ul><ul><li>Minimizing double taxation </li></ul></ul>
  12. 12. Fringe Benefits (slide 1 of 2) <ul><li>Generally produce the following tax consequences: </li></ul><ul><ul><li>Deductible by entity (employer) providing the fringe benefit </li></ul></ul><ul><ul><li>Excludible from gross income of taxpayer (employee) who receives the fringe benefit </li></ul></ul>
  13. 13. Fringe Benefits (slide 2 of 2) <ul><li>Favorable tax treatment of fringe benefits is available only to employees </li></ul><ul><ul><li>For owner of entity to be an employee, the entity must be a corporation </li></ul></ul><ul><ul><ul><li>Partners in a partnership are not employees </li></ul></ul></ul><ul><ul><ul><li>Greater-than-2% shareholders in an S corp are treated as partners </li></ul></ul></ul><ul><ul><li>If not an employee </li></ul></ul><ul><ul><ul><li>Deduction of cost of fringe benefit is disallowed </li></ul></ul></ul><ul><ul><ul><li>Owner must include cost of fringe benefit in gross income </li></ul></ul></ul>
  14. 14. Minimizing Double Taxation of C Corporations (slide 1 of 5) <ul><li>Several techniques are available for reducing the double taxation of C corps including: </li></ul><ul><ul><li>Making distributions to shareholders that are deductible by corp </li></ul></ul><ul><ul><li>Retaining earnings at corp level </li></ul></ul><ul><ul><li>Making distributions treated as a return of capital </li></ul></ul><ul><ul><li>Making the S corp election </li></ul></ul>
  15. 15. Minimizing Double Taxation of C Corporations (slide 2 of 5) <ul><li>Deductible distributions include: </li></ul><ul><ul><li>Salary payments to shareholder-employees </li></ul></ul><ul><ul><li>Rental payments to shareholder-lessors </li></ul></ul><ul><ul><li>Interest payments to shareholder-creditors </li></ul></ul><ul><li>IRS scrutinizes these types of transactions </li></ul><ul><ul><li>Must be reasonable </li></ul></ul>
  16. 16. Minimizing Double Taxation of C Corporations (slide 3 of 5) <ul><li>Retain earnings at corporate level </li></ul><ul><ul><li>Double tax is avoided unless corp makes distributions (actual or deemed) to shareholders </li></ul></ul><ul><ul><ul><li>Must watch out for accumulated earnings tax problems </li></ul></ul></ul><ul><ul><li>For distributions made in 2003 and thereafter the 15%/0% rate for qualified dividends reduces the potential negative impact of double taxation </li></ul></ul>
  17. 17. Minimizing Double Taxation of C Corporations (slide 4 of 5) <ul><li>Make return of capital distributions </li></ul><ul><ul><li>For ongoing businesses, redemption provisions may help reduce gross income at the shareholder level </li></ul></ul><ul><ul><li>Corporate liquidation provisions can be used if business will cease to operate in corporate form </li></ul></ul>
  18. 18. Minimizing Double Taxation of C Corporations (slide 5 of 5) <ul><li>Electing S corp status </li></ul><ul><ul><li>Generally eliminates double taxation but other factors must be considered such as: </li></ul></ul><ul><ul><ul><li>Will all shareholders consent to election? </li></ul></ul></ul><ul><ul><ul><li>Can qualification requirements be met currently and on an ongoing basis? </li></ul></ul></ul><ul><ul><ul><li>Are conditions favorable to an S corp election and how long will those conditions be favorable </li></ul></ul></ul><ul><ul><ul><li>Distribution policy may cause problems paying tax at shareholder level </li></ul></ul></ul>
  19. 19. Entity Formation (slide 1 of 2) <ul><li>Generally, owners make contributions of cash and property to entity in exchange for an ownership interest </li></ul><ul><ul><li>Generally, tax-free to both the entity and the owner </li></ul></ul><ul><ul><ul><li>In corporate setting, requirements of §351 must be met </li></ul></ul></ul><ul><ul><li>Owners and entities take a carryover basis in their ownership interest and in assets contributed, respectively </li></ul></ul>
  20. 20. Entity Formation (slide 2 of 2) <ul><li>If FMV of property contributed > adjusted basis, may want to make special allocation </li></ul><ul><ul><li>Required in partnerships </li></ul></ul><ul><ul><li>Not available for C corps or S corps </li></ul></ul>
  21. 21. Basis Considerations <ul><li>Sole Proprietorship </li></ul><ul><li>N/A </li></ul><ul><li>Partnership and LLC </li></ul><ul><li>Profits & losses affect partner’s basis </li></ul><ul><li>Partner’s basis is increased by share of p’ship liabilities </li></ul><ul><li>C Corporation </li></ul><ul><li>Shareholder’s basis is not affected by corporate profits & losses </li></ul><ul><li>S Corporation </li></ul><ul><li>Shareholder’s basis is increased by profits, decreased by losses, not affected by corporate liabilities </li></ul>
  22. 22. Distributions <ul><li>Distributions can be made to partners, LLC owners, or S corp. shareholders tax-free </li></ul><ul><ul><li>The same distribution would produce dividend income treatment for C corp. shareholders </li></ul></ul><ul><li>If appreciated property is distributed to S corp. shareholders, realized gain is recognized at the corporate level (same treatment as a C corp.) </li></ul><ul><ul><li>This corporate-level gain is passed-through to the S corp. shareholders </li></ul></ul>
  23. 23. Passive Activity Losses (slide 1 of 2) <ul><li>Loss limits apply to owners of partnerships, LLCs, and S corps </li></ul><ul><ul><li>Passive losses are separately stated items that flow through to owners </li></ul></ul><ul><ul><li>Passive loss rules apply at the owner level </li></ul></ul>
  24. 24. Passive Activity Losses (slide 2 of 2) <ul><li>For corporations, only apply if a closely held corp or a personal service corp </li></ul><ul><ul><li>Closely held corp—more than 50% of value of stock at any time during last half of year is owned by 5 or less individuals </li></ul></ul><ul><ul><ul><li>Passive losses can offset active income but not portfolio income </li></ul></ul></ul><ul><ul><li>Personal service corp—principal activity is performance of personal services by owner-employees who own more than 10% in value of corp’s stock </li></ul></ul><ul><ul><ul><li>General passive loss rules apply </li></ul></ul></ul>
  25. 25. At-Risk Rules <ul><li>At-risk rules apply to: </li></ul><ul><ul><li>Partnerships </li></ul></ul><ul><ul><li>LLCs </li></ul></ul><ul><ul><li>S corps </li></ul></ul><ul><ul><li>Closely held C corps </li></ul></ul><ul><li>May be more troublesome for partnerships and LLCs since liabilities are included in partner’s basis in partnership interest </li></ul>
  26. 26. Special Allocations <ul><li>Partnership and LLCs have many opportunities to use special allocations </li></ul><ul><ul><li>Not generally available in C corps and S corps </li></ul></ul><ul><ul><ul><li>May be able to achieve the same results using payments to owners for services, rents and interest </li></ul></ul></ul>
  27. 27. Disposition of a Business or an Ownership Interest <ul><li>Disposing of a business may be viewed as either: </li></ul><ul><ul><li>A sale of an ownership interest, or </li></ul></ul><ul><ul><li>A sale of assets </li></ul></ul><ul><li>Tax consequences are, in general, more favorable for a sale of an ownership interest </li></ul>
  28. 28. Sale of Assets by Entity —Seller’s Issues (slide 1 of 3) <ul><li>Sole Proprietorship </li></ul><ul><ul><li>Treated as a sale of separate assets </li></ul></ul><ul><ul><li>Gain or loss is calculated for each asset </li></ul></ul><ul><ul><ul><li>Character of income or loss depends on nature of asset </li></ul></ul></ul>
  29. 29. Sale of Assets by Entity —Seller’s Issues (slide 2 of 3) <ul><li>Partnership, LLC, or S Corp—Same as proprietorship </li></ul><ul><ul><li>Gain/loss flows through to shareholders or partners </li></ul></ul><ul><ul><ul><li>They report & pay tax on gain or loss </li></ul></ul></ul><ul><ul><ul><li>Distribution of cash proceeds does not cause double tax since basis is adjusted by gain/loss </li></ul></ul></ul>
  30. 30. Sale of Assets by Entity —Seller’s Issues (slide 3 of 3) <ul><li>C Corp—double taxation occurs </li></ul><ul><ul><li>Gain is determined for each asset and tax paid by corporation </li></ul></ul><ul><ul><li>Net cash is distributed </li></ul></ul><ul><ul><ul><li>Taxed as dividend, return of capital or capital gain to shareholder </li></ul></ul></ul>
  31. 31. Liquidating Distribution of Assets to Owner Followed by Owner’s Sale to Third Party (slide 1 of 3) <ul><li>Partnership </li></ul><ul><ul><li>Distribution rules determine partner’s basis in assets received from partnership </li></ul></ul><ul><ul><li>Partner has gain if cash received > basis </li></ul></ul><ul><ul><li>Partner has loss if cash, inventory and unrealized receivables are only assets rec’d and are < basis </li></ul></ul><ul><ul><li>Character of gain on asset sale depends on nature of assets received by partner </li></ul></ul><ul><ul><li>No double tax </li></ul></ul>
  32. 32. Liquidating Distribution of Assets to Owner Followed by Owner’s Sale to Third Party (slide 2 of 3) <ul><li>S Corp </li></ul><ul><ul><li>S Corp has gain if appreciated assets distributed to shareholders </li></ul></ul><ul><ul><li>No corporate level tax unless “built-in gain” </li></ul></ul><ul><ul><li>Shareholder has gain (tax) on receipt of assets > basis (after basis increase for gain) </li></ul></ul><ul><ul><li>Shareholder’s basis in assets = FMV, so no gain on later sale of assets </li></ul></ul>
  33. 33. Liquidating Distribution of Assets to Owner Followed by Owner’s Sale to Third Party (slide 3 of 3) <ul><li>C Corp </li></ul><ul><ul><li>Double tax </li></ul></ul><ul><ul><li>Gain on distribution and tax at entity level </li></ul></ul><ul><ul><li>Net (after tax) assets distributed at FMV & result in gain to shareholder </li></ul></ul>
  34. 34. Purchase of Business Assets—Buyer’s Issues (slide 1 of 2) <ul><li>The purchaser of individual assets is not generally affected by the type of entity through which the seller operates: </li></ul><ul><ul><li>The buyer (whether individual, partnership, LLC, C corp or S corp) allocates the total amount paid to the individual assets acquired </li></ul></ul><ul><ul><li>Part of the cost may be allocated to intangible assets such as goodwill </li></ul></ul>
  35. 35. Purchase of Business Assets—Buyer’s Issues (slide 2 of 2) <ul><li>Asset cost is recovered through depreciation, amortization, sale of inventory, collection of accounts receivable, etc... </li></ul><ul><li>The buyer can contribute the assets to a partnership or C corp under § 721 or § 351 </li></ul><ul><ul><li>If the C corp is qualified, an S corp election can be made </li></ul></ul>
  36. 36. Sale of Business Interest—Seller’s Issues (slide 1 of 3) <ul><li>Sole Proprietorship </li></ul><ul><ul><li>No distinction between sale of interest or assets </li></ul></ul><ul><li>Partnership </li></ul><ul><ul><li>Sale of partnership interest results in ordinary income to partner for share of partnership’s ordinary income assets; capital gain for remainder </li></ul></ul>
  37. 37. Sale of Business Interest—Seller’s Issues (slide 2 of 3) <ul><li>S Corp </li></ul><ul><ul><li>Sale treated as sale of stock </li></ul></ul><ul><ul><ul><li>Results in capital gain or loss to shareholder </li></ul></ul></ul><ul><ul><li>In general, no corporate-level consequences </li></ul></ul><ul><ul><ul><li>However, if purchaser is not qualified shareholder, S election is automatically terminated </li></ul></ul></ul>
  38. 38. Sale of Business Interest— Seller’s Issues (slide 3 of 3) <ul><li>C Corp </li></ul><ul><ul><li>Sale treated as sale of stock </li></ul></ul><ul><ul><ul><li>Results in capital gain or loss to shareholder </li></ul></ul></ul><ul><ul><li>No corporate level consequences </li></ul></ul>
  39. 39. Purchase of Business Interest—Buyer’s Issues (slide 1 of 3) <ul><li>If the purchaser acquires an interest in one of these types of entities, he or she is treated as follows: </li></ul><ul><li>Sole Proprietorship </li></ul><ul><ul><li>Purchaser is deemed to buy assets </li></ul></ul><ul><ul><ul><li>Purchase price is allocated to assets </li></ul></ul></ul><ul><ul><ul><li>Assets are depreciated, amortized, etc... </li></ul></ul></ul>
  40. 40. Purchase of Business Interest—Buyer’s Issues (slide 2 of 3) <ul><li>Partnership </li></ul><ul><ul><li>Purchaser buys partnership interest </li></ul></ul><ul><ul><li>Purchaser may ask partnership to make §754 election to step up inside basis in assets </li></ul></ul>
  41. 41. Purchase of Business Interest—Buyer’s Issues (slide 3 of 3) <ul><li>S Corp or C Corp </li></ul><ul><ul><li>Purchaser buys stock </li></ul></ul><ul><ul><li>There is no effect on underlying assets owned by the entity </li></ul></ul>
  42. 42. Tax Attributes of Different Business Forms (slide 1 of 19) <ul><li> Maximum Max Tax Tax </li></ul><ul><li> # Owners Rate Paid By . </li></ul><ul><li>Sole Prop. One individual 35% Owner </li></ul><ul><li>Partnership At least two 35% Partner </li></ul><ul><li>(or LLC) </li></ul><ul><li>S Corp. Max = 100 35% Shareholder </li></ul><ul><li>Individuals, (Corp. may </li></ul><ul><li>estates, some have built-in </li></ul><ul><li> trusts only gains or PII tax) </li></ul>
  43. 43. Tax Attributes of Different Business Forms (slide 2 of 19) <ul><li> Maximum Max Tax Tax </li></ul><ul><li> # Owners Rate Paid By . </li></ul><ul><li>C Corp No max limit 35% corporate Corporation (some States level plus pays first, require at 15% max. then owner </li></ul><ul><li> least two on qualifying pays if </li></ul><ul><li> owners) distributions distribution </li></ul>
  44. 44. Tax Attributes of Different Business Forms (slide 3 of 19) <ul><li> Tax Year Timing of Income </li></ul><ul><li> Allowed Taxation Allocation . </li></ul><ul><li>Sole Prop. Owner’s yr. Owner’s N/A </li></ul><ul><li> yr. end (1 owner) </li></ul><ul><li>Partnership Majority or End of p/ship Profit/loss </li></ul><ul><li>LLC Principal tax year sharing ratio </li></ul><ul><li> Ptrs or “least Some special </li></ul><ul><li> aggregate allocations OK </li></ul><ul><li> deferral” year </li></ul>
  45. 45. Tax Attributes of Different Business Forms (slide 4 of 19) <ul><li> Tax Year Timing of Income </li></ul><ul><li> Allowed Taxation Allocation </li></ul><ul><li>S Corp. Calendar year or End of Corp Per share, </li></ul><ul><li> business purpose tax year per day </li></ul><ul><li>C Corp. No restrictions Corp reports at N/A </li></ul><ul><li> (generally) end of tax yr; </li></ul><ul><li>Shareholder reports </li></ul><ul><li>dividends received </li></ul>
  46. 46. Tax Attributes of Different Business Forms (slide 5 of 19) <ul><li> Contribution of Character of Income </li></ul><ul><li> Property to Entity Taxed to Owners . </li></ul><ul><li>Sole Prop. Not taxable Retains source </li></ul><ul><li> characteristics </li></ul><ul><li>Partnership Generally not Conduit-retains taxable source characteristics </li></ul>
  47. 47. Tax Attributes of Different Business Forms (slide 6 of 19) <ul><li> Contribution of Character of Income </li></ul><ul><li>Property to Entity Taxed to Owners . </li></ul><ul><li>S Corp. Taxable unless Conduit-retains source </li></ul><ul><li>meets §351 characteristics </li></ul><ul><li>C Corp. Taxable unless All source character- </li></ul><ul><li>meets §351 istics lost when income distributed to owners </li></ul>
  48. 48. Tax Attributes of Different Business Forms (slide 7 of 19) <ul><li>Loss Allocation Limitation on Loss </li></ul><ul><li> to Owners Deductible by Owners </li></ul><ul><li>Sole Prop. Not applicable Amount invested plus </li></ul><ul><li>liabilities of business </li></ul><ul><li>Partnership Profit and loss Ptr’s investment plus </li></ul><ul><li>sharing ratios share of partnership </li></ul><ul><li>liabilities </li></ul>
  49. 49. Tax Attributes of Different Business Forms (slide 8 of 19) <ul><li>Loss Allocation Limitation on Loss </li></ul><ul><li> to Owners Deductible by Owners </li></ul><ul><li>S Corp. Per share/ S/holder’s investment </li></ul><ul><li>per day plus loans from s/holder </li></ul><ul><li>to corporation </li></ul><ul><li>C Corp. Not applicable Not applicable </li></ul>
  50. 50. Tax Attributes of Different Business Forms (slide 9 of 19) <ul><li>At-risk Rules Passive Loss Rules </li></ul><ul><li> Applicable? Applicable? . </li></ul><ul><li>Sole Prop., Yes, at the Yes, at the </li></ul><ul><li>Partnership owner, partner owner, partner or </li></ul><ul><li>and S Corp. or shareholder shareholder level. </li></ul><ul><li>level. Indefinite Indefinite carryover </li></ul><ul><li>carryover of of unused losses </li></ul><ul><li>unused losses </li></ul>
  51. 51. Tax Attributes of Different Business Forms (slide 10 of 19) <ul><li> At- risk Rules Passive Loss Rules </li></ul><ul><li> Applicable? Applicable? . </li></ul><ul><li>C Corp. Yes, for closely held Yes, for closely held </li></ul><ul><li>corporations. Indefinite and personal service </li></ul><ul><li>carryover of unused corporations. losses. Indefinite carryover of unused losses. </li></ul>
  52. 52. Tax Attributes of Different Business Forms (slide 11 of 19) <ul><li> Capital Gains Capital Losses . </li></ul><ul><li>Sole Prop. Owner level Up to $3,000 against </li></ul><ul><li> 0/15% tax ord. income. Indefinite </li></ul><ul><li>carryover of excess. </li></ul><ul><li>Partnership Conduit-owners Conduit-owners </li></ul><ul><li>and S Corp. report shares same report shares same </li></ul><ul><li> as Sole Prop. as Sole Prop. </li></ul><ul><li>C Corp. Taxed at Corporate Carried back 3 yrs, </li></ul><ul><li> level up to 35 %. forward 5. Can only </li></ul><ul><li>offset capital gains. </li></ul>
  53. 53. Tax Attributes of Different Business Forms (slide 12 of 19) <ul><li> Consequence of Treatment of </li></ul><ul><li>Earnings Retained Nonliquidating </li></ul><ul><li> by Owners Distributions . </li></ul><ul><li>Sole Prop. Taxed when earned; Not taxable </li></ul><ul><li>increases investment in S.P. </li></ul><ul><li>Partnership Same as S.P. Not taxable unless </li></ul><ul><li> cash or liability relief > Ptrs. basis </li></ul>
  54. 54. Tax Attributes of Different Business Forms (slide 13 of 19) <ul><li> Consequence Treatment of </li></ul><ul><li> Of Earnings Retained Nonliquidating </li></ul><ul><li> by Owners Distributions . </li></ul><ul><li>S Corp. Same as S.P. Generally not taxable unless </li></ul><ul><li>distribution > AAA or stock </li></ul><ul><li>basis. May be dividend if </li></ul><ul><li>E & P from Sub C year. </li></ul><ul><li>C Corp. Taxed to corp. as Taxed in yr received up to </li></ul><ul><li>earned. Possible AE & P or if > stock basis. </li></ul><ul><li>AE Tax. </li></ul>
  55. 55. Tax Attributes of Different Business Forms (slide 14 of 19) <ul><li> Sale of Ownership Interest . </li></ul><ul><li>Sole Prop. Treated as a sale of each asset. Gain character depends on asset nature. </li></ul><ul><li>Partnership Treated as sale of underlying ordinary income assets. Remainder treated as sale of partnership interest (capital gain). </li></ul>
  56. 56. Tax Attributes of Different Business Forms (slide 15 of 19) <ul><li> Sale of Ownership Interest . </li></ul><ul><li>S Corporation Treated as sale of corporate stock </li></ul><ul><li>or C Corp. (capital gain). Loss may be ordinary if § 1244 applies, otherwise capital. </li></ul>
  57. 57. Tax Attributes of Different Business Forms (slide 16 of 19) <ul><li> Fringe Benefits §1244 Built-in </li></ul><ul><li> Avail. to Owners? Available? Gains effect? </li></ul><ul><li>Sole Prop. No No N/A </li></ul><ul><li>P’ship No No N/A </li></ul><ul><li>S Corp. Some if < 2% Yes Possible corp. </li></ul><ul><li> owner level tax </li></ul><ul><li>C Corp . Available Yes No effect </li></ul><ul><li> Limited by </li></ul><ul><li> anti-discrim.rules </li></ul>
  58. 58. Tax Attributes of Different Business Forms (slide 17 of 19) <ul><li> §1231 Gains Foreign Tax </li></ul><ul><li> and Losses Credits . </li></ul><ul><li>Sole Prop. Taxable or deductible Owner level </li></ul><ul><li>by owner. 5 yr. </li></ul><ul><li>lookback rule. </li></ul><ul><li>Partnerships Conduit—same Conduit—same </li></ul><ul><li>and S Corps as S.Prop. as S.Prop. </li></ul><ul><li>C Corp. Taxable/deductible Available </li></ul><ul><li>at corp. level 5 yr. Corporate level lookback rule </li></ul>
  59. 59. Tax Attributes of Different Business Forms (slide 18 of 19) <ul><li> Tax </li></ul><ul><li> Alternative ACE Preference </li></ul><ul><li> Min. Tax Adjustment Items . </li></ul><ul><li>Sole Prop. Applies at N/A Determined at </li></ul><ul><li>owner level owner level </li></ul><ul><li>(26% or 28%) </li></ul><ul><li>Partnership Applies at N/A Conduit—entity </li></ul><ul><li>or S Corp. ptr or preferences shareholder (26% or 28%) level pass thru to owners for their AMT calc. </li></ul>
  60. 60. Tax Attributes of Different Business Forms (slide 19 of 19) <ul><li> Tax </li></ul><ul><li> Alternative ACE Preference </li></ul><ul><li> Min. Tax Adjustment Items . </li></ul><ul><li>C Corp . Applies at Corp. 75% x (ACE Subject to </li></ul><ul><li>level (20%) -AMTI) is AMT at </li></ul><ul><li>added to AMTI corporate </li></ul><ul><li>(or subtracted) level </li></ul>
  61. 61. <ul><li>If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: </li></ul><ul><li>Dr. Donald R. Trippeer, CPA </li></ul><ul><li>[email_address] </li></ul><ul><li>SUNY Oneonta </li></ul>

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