1. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Essentials of Taxation Chapter 1 – Introduction to Business Entities Introduction to Business Entities – Edited by TK 1

2. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Various Business Forms Sole proprietorships Regular corporations (also called C corporations) Partnerships S corporations Limited liability companies Limited liability partnerships C1-2

3. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sole Proprietorship Not a separate taxable entity Income reported on owner’s Form 1040, Schedule C –Net business income included in owner’s income and subject to self-employment tax C1-3

4. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. C Corporation Separate tax-paying entity –Reports income and expenses on Form 1120 –Income taxed at corporate level and again at owner level when distributed as a dividend C Corporation is subject to double tax C1-4

5. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Partnership Separate entity, but does not pay tax Allocates partnership income to partners –Partners report partnership income on personal tax returns Files information return (Form 1065) C1-5

6. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. S Corporation Separate entity, only pays special taxes (e.g.,built-in gains) Allocates entity income to shareholders –Shareholders report entity income on personal tax return Files information return (Form 1120S) C1-6

7. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Limited Liability Companies and Limited Liability Partnerships These organizations exist under state laws –Specific rules vary somewhat from state to state Both forms have limited liability and some (but not all) of the other nontax features of corporations Both forms usually are treated as partnerships for tax purposes C1-7

8. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dealings Between Individuals and Entities (slide 1 of 2) Many tax provisions deal with the relationship between owners and their business entities, including the following interactions: –Owners put assets into a business when they establish a business entity –Owners take assets out of the business during its existence in the form of: Salary, dividends, withdrawals, redemptions of stock, etc. –Through their entities, owner-employees set up retirement plans for themselves, including IRAs, Keogh plans, and qualified pension plans –Owners dispose of all or part of a business entity C1-8

9. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Dealings Between Individuals and Entities (slide 2 of 2) Transactions between owner and business entity have important tax ramifications, e.g., –How to avoid taxation at both owner and entity levels (i.e., the multiple taxation problem) –How to do the following with the least adverse tax consequences: Get assets into the business Get assets out of the business Dispose of the business entity C1-9

10. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employment Taxes (slide 1 of 3) FICA taxes –Paid by both an employee and employer –Social Security rate is 6.2% on a maximum of $113,700/$117,000 (in 2013/2014) of wages, and Medicare rate is 1.45% on all wages A spouse employed by another spouse is subject to FICA Children under the age of 18 who are employed in parent’s unincorporated trade or business are exempt from FICA C1-10

11. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employment Taxes (slide 2 of 3) FICA taxes –Sole proprietors and independent contractors may also be subject to Social Security taxes Known as the self-employment tax Rates are 12.4% for Social Security and 2.9% for Medicare –Twice the rates applicable to an employee The tax is imposed on net self-employment income up to a base amount of $113,700/$117,000 for 2013/2014. C1-11

12. © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employment Taxes (slide 3 of 3) FUTA (unemployment) taxes –Provides funds for state unemployment benefits –In 2014, rate is 6.0% on first $7,000 of wages for each employee –Administered jointly by states & Fed govt. Credit is allowed (up to 5.4%) for FUTA paid to the state –Tax is paid by employer C1-12