650 chap002 fa14
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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
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
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