...1. John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? John is to report the $300,000 as earned income. This gross income can be filed on Schedule C of his individual tax return or as gross income on the LLC return. Our course text book defines gross income as gross income is defined by the Code as including gross income derived from a business. Income is the fundamental concept of income is set forth in the Sixteenth Amendment, “incomes from whatever source derived”. The reason why he can report this income on the individual return or LLC return is a result of the variance in state laws as to whether a single person LLC can report on a business return or not. For the states that don’t allow separate reporting, then John cannot file this income on the individual return. The $300,000 is considered taxable income in this case. Gross income, for income tax purposes, refers to all income that is taxable. The law enumerates specific items of income that are not to be included in gross income and, therefore, are nontaxable. With these exceptions, all income is includible in gross income. Gross income includes all items of income from whatever source unless specifically excluded. All compensation received by the individual is included in gross income. b. How is the $25,000 treated for purposes of federal tax income? Assuming that John had $25,000 in expenses that was incurred and paid in the same year, and if this is true, then $25,000...
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...W-9 Form (Rev. December 2014) Department of the Treasury Internal Revenue Service Request for Taxpayer Identification Number and Certification Give Form to the requester. Do not send to the IRS. Print or type See Specific Instructions on page 2. 1 Name (as shown on your income tax return). Name is required on this line; do not leave this line blank. 2 Business name/disregarded entity name, if different from above 3 Check appropriate box for federal tax classification; check only one of the following seven boxes: C Corporation S Corporation Partnership Trust/estate Individual/sole proprietor or single-member LLC Limited liability company. Enter the tax classification (C=C corporation, S=S corporation, P=partnership) ▶ Note. For a single-member LLC that is disregarded, do not check LLC; check the appropriate box in the line above for the tax classification of the single-member owner. 4 Exemptions (codes apply only to certain entities, not individuals; see instructions on page 3): Exempt payee code (if any) Exemption from FATCA reporting code (if any) (Applies to accounts maintained outside the U.S.) Other (see instructions) ▶ 5 Address (number, street, and apt. or suite no.) Requester’s name and address (optional) 6 City, state, and ZIP code 7 List account number(s) here (optional) Part I Taxpayer Identification Number (TIN) Enter your TIN in the appropriate box. The TIN provided must match the name given on line 1...
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...are each taxed (more or less) on their proportionate shares of the entity's income. The leading forms of pass through entity (further explained below) are: Partnerships, of various types. "S-corporations" (S-corps), as distinguished from C-corps. Limited liability companies (LLCs). A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass through entity even though no "organization" may be involved. The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass through entity that has only one level (directly on the owners). Losses are directly deductible by pass through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners. The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business. Different Types of Business Entities C and S-Corps The S-Corp...
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...John Smith worked on a case for more than two years and received a lump sum payment of $300,000 for his work plus an additional $25,000 for pre-paid expenses. He wants to know how this money will be treated for tax purposes. John’s company is what is known as an LLC or Limited Liability Company, and for U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. Since John is the only person in the company, the LLC is treated as a “disregarded entity” for tax purposes, and an individual owner would report the LLC’s income or loss on Schedule C of his individual tax return. According to the IRS, Taxable earned income includes: • Wages, salaries, tips, and other taxable employee pay • Union strike benefits • Long-term disability benefits received prior to minimum retirement age • Net earnings from self-employment • Gross income received as a statutory employee (What is Earned Income?, 2012) According to the IRS description above, John earned a total of $325,000 from the case that would be considered taxable income. The $25,000 is included as income for the expenses that John has incurred over the past two years. However, John will only be able to deduct expenses that occurred during the current year and any prior year expenses should have been deducted in the tax year that they were incurred. If this was not completed, he should amend any previous year’s return to reflect the deductions. This money is reported as income and should be reported...
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...ARKANSAS STARTING A NEW BUSINESS An Educational Brochure for Arkansas Taxpayers Department of Finance and Administration P. O. Box 1272 Little Rock, AR 72203 TABLE OF CONTENTS Page SALES & USE TAX .......................................................................................................... 1 INCOME TAX WITHHOLDING....................................................................................... 3 MISCELLANEOUS TAX................................................................................................... 5 INDIVIDUAL ESTIMATED TAX ..................................................................................... 6 PARTNERSHIPS AND LLC’s .......................................................................................... 8 SUBCHAPTER S CORPORATIONS ............................................................................. 10 CORPORATION INCOME TAX .................................................................................... 13 MOTOR FUEL TAX ........................................................................................................ 16 MOTOR CARRIER FUEL TAX ..................................................................................... 16 ELECTRONIC FUNDS TRANSFER ............................................................................. 17 OTHER IMPORTANT STATE CONTACTS ................................................................. 18 OTHER IMPORTANT CONTACTS .........................................
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...sole proprietorship, partnership, limited liability partnership, limited liability company, S corporation, franchise, and corporate form. Formation, Taxation, Control, Liability, Employee Issues, Federal, State and/or local laws affect ting the type of business, and Dissolution. Different forms of business are customized to suit corporations due the amount of liability that is spread throughout the business. One form of business may be a safer and more profitable alternative because investors can invest with low risk. For example, a sole proprietorship is the simplest form of business. It refers to a person who owns a business and is personally responsible for the debt of the business. A good sole proprietorship scenario would be an entrepreneur selling baseball caps out of the back his or her automobile. The sole owner is personally held accountable for anything that may go wrong with the business but the likelihood of this occurrence is low due to the fact the store is on wheels. The major disadvantages of this form of business are creditors can bring lawsuits against the business owner for the debt of the business. The owner earns the income so the owner files a Schedule C and a standard Form 1040 and receives the bottom line amount in their personal tax return. Legally, sole proprietorships have the simplest structure but they also lack many of the protections that other business form have. The business has no separate existence from the owner. In the event of crisis...
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...Form (Rev. December 2011) Department of the Treasury Internal Revenue Service W-9 Request for Taxpayer Identification Number and Certification Give Form to the requester. Do not send to the IRS. Name (as shown on your income tax return) Business name/disregarded entity name, if different from above Print or type See Specific Instructions on page 2. Check appropriate box for federal tax classification: Individual/sole proprietor C Corporation S Corporation Partnership Trust/estate Exempt payee Limited liability company. Enter the tax classification (C=C corporation, S=S corporation, P=partnership) ▶ Other (see instructions) ▶ Address (number, street, and apt. or suite no.) City, state, and ZIP code List account number(s) here (optional) Requester’s name and address (optional) Part I Taxpayer Identification Number (TIN) Social security number Enter your TIN in the appropriate box. The TIN provided must match the name given on the “Name” line to avoid backup withholding. For individuals, this is your social security number (SSN). However, for a resident alien, sole proprietor, or disregarded entity, see the Part I instructions on page 3. For other entities, it is your employer identification number (EIN). If you do not have a number, see How to get a TIN on page 3. Note. If the account is in more than one name, see the chart on page 4 for guidelines on whose number to enter. – – Employer identification number – Part II Certification ...
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...tax income? Gross income, as defined in IRC 26 § 61, is “all income from whatever source derived, including (but not limited to) the following items: (1) compensation for services, including fees, commissions, fringe benefits, and similar items.” (IRC 26 § 61(a)(1)). With this understanding, the $300,000 is considered fees and must be treated as gross income, and is subject to Federal income taxes. Based on the verbiage from the IRS, “an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.” (IRS.gov). John will be expected to report the full $300,000 of earned income on Schedule C of his individual tax return, or can be claimed as gross income on the LLC return. Based on the variance in state laws, a single person LLC can report income on the business return or individual. An LLC is considered transparent in states that do not allow separate reporting. This means that the income cannot be reported apart from the individual. By filing Form 8832, John will be able to choose a tax status for the entity besides the default of individual. In some cases, changing the tax status will save a company thousands in taxes each year. b) How is the $25,000 treated for purposes of...
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...Chapter 2 Questions/Problems 8, 11, 12, 13 15. 8. Under the check-the-box Regulations, LLCs are be taxed as follows. A single-member LLC is taxed as a proprietorship unless an election is made on Form 8832 to be taxed as a corporation. An LLC with more than one owner is taxed as a partnership unless an election is made on Form 8832 to be taxed as corporation. Entities that are incorporated under state law or required to be taxed as corporations under Federal law (e.g., certain publicly traded partnerships) cannot make an election under the check-the-box Regulations. p. 2-8 11. A PSC is a corporation that has as its principal activity the performance of personal services, and such services are substantially performed by shareholder-employees. The performance of services must be in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. In general, a PSC must adopt a calendar year. However, a PSC can elect a fiscal year under any of the following conditions: • A business purpose for the year can be demonstrated. • A § 444 election is made that provides for a three month or less deferral period. The deduction limitations of § 280H will apply to the PSC. • An election was made under § 444 to retain its fiscal year ending 1987. p. 2-10 12. In general, a corporation is not allowed to use the cash method of accounting for Federal tax purposes. However, S corporations, qualified personal service corporations...
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...Business Structure Types for Forming a Business Business Law/LAW 531 Business Structure Types for Forming a Business When I person decides to be an entrepreneur, choosing the type of business structure that would be right for the business they plan to open can be a daunting task. The reason is being is that there are many different types of business structures a person can choose from. Before making the decision on the type of business structure for the business, there are a few things that should be done before hand. The entrepreneur would first need to have a business plan that will guide them on how they would start the business and run it successfully. Next they should get any necessary assistance or training on how to go about forming a business. Once this has been done, a business structure can be determined after researching each type of structure to see which would fit their business idea the best. In the process of starting a business, choosing the type of legal business structure for a business will be one of the most important tasks a new entrepreneur will do. The reason is that whichever structure is chosen will have an impact on items like taxes the entrepreneur will pay, the amount of paperwork required for the business structure picked, the personal liability the business will have, and the ability to raise the money for the business structure picked. When going forward with the formation of the business, a person will have to know...
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...on the feasibility and specifics of your concept, (3) Focusing and refining the concept based on the data you compile, (4) Outlining the specifics of your business, and (5) Putting your plan in compelling form”. New Business Project Business Name: Universal ATM Service Product or Service: Retailed of Automated Teller Machines, Automated Teller Machines Products, Transactions Processing, Automated Teller Machines Placement, and Automated Teller Machines Services and Repairs. Business Structure: Limited Liability Company (LLC) Rationale for choosing this form of business organization: the founders of Universal ATM Service have opt to file as an LLC for their new business structure. Management has chosen this entity because it allows the benefit to “pass-through entities”. This will benefit the company’s owners by not been obligated to pay any income tax as a corporation, do to self employment. Another great benefit that attracted us to choosing an LLC is because it limits the liability on the owners with the...
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...2 CORPORATIONS: INTRODUCTION AND OPERATING RULES SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective 1 LO 1 2 LO 1 3 LO 1, 7 4 LO 1, 2 5 6 LO 1, 2 LO 1, 2 7 8 9 10 LO 1 LO 1 LO 1 LO 2 11 LO 2 12 LO 2 13 LO 2 14 LO 2 15 LO 2 16 17 LO 2 LO 2 18 LO 2 Topic Choice of entity: tax and nontax factors in entity selection Corporation versus S corporation: treatment of operating income and tax-exempt income; no distributions Corporation versus proprietorship: treatment of losses Corporation versus partnership: treatment of operating income and STCG Corporation versus LLC and S corporation Closely held corporations: shareholder transactions Double taxation LLCs: single member LLCs: multi-owner default rule Accounting periods: general rule and fiscal year limitation Accounting periods: PSC fiscal year limitation Accounting methods: limitation on cash method Accounting methods: limitation on accrual of expenses to cash basis related party Net capital gain: corporate and individual tax rates contrasted Net capital loss: corporation and individual contrasted Recapture of depreciation: § 291 adjustment Passive loss rules: closely held C corporations and PSCs contrasted Passive loss rules: closely held C corporation Status: Present Edition Q/P in Prior Edition Unchanged 1 Unchanged 2 Unchanged 3 Unchanged 4 Unchanged ...
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...Sole Proprietorship * Liability – Sole Proprietorship offers unlimited liability which states that you as the owner are solely responsible for all debts from your personal assets. You can lose not only the money initially invested in the business but also personal assets. * Income Taxes – Due to you being the sole owner there is no separate business income tax filing for a business under Sole Proprietorship. Business income or loss is reported on the sole proprietor’s personal tax return, and any tax is paid at the individual level. * Longevity / Continuity - The Sole Proprietor is the sole owner, with no partners in the business, if the Sole Proprietor becomes disabled, retires or dies the business is dissolved. A business operated under Sole Proprietorship does not offer the perpetual existence of a corporation. * Control – Control of a business that is under sole proprietorship falls under the sole owner. Under a Sole Proprietorship you are not permitted to bring in any business partners, if you do then this would become a General Partnership Business. * Profit Retention – All profits gained under Sole Proprietorship belong to you the owner. However, you are also responsible for any bills incurred prior to any profit being taken. * Location - Expanding or moving a business that is under “Sole Proprietorship” is not very complicated. To move, you register your name or the business’ name to the state you are moving to. The only rule for a business...
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...Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust. I.R.C § 61 Analysis: Section 61(a) it basically says that the gross income is not limited to these items, but that these are just the most typical sources of income. It is irrelevant whether or not the above items are received in money, goods, or services. Conclusion: The $300,000 that John received for services rendered from the court case is considered earned income for the year. The $300,000 is earned income for John Smith and will be reported as gross income either on Schedule C of the individual return or as gross income on the LLC return. “US code defines gross income in 26 U.S.C § 61 states except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including but not limited to the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.” There isn’t any other way to treat the $300,000 because it is considered gross income and...
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...relevant II. Classifying Partnerships for Tax Purposes a. Two or more members: pship or corporation 7701-2(a) i. Default = partnership 7701-3(b)(1)(i) 1. Applies to LLCs 2. To opt out of default Check-the-box 3. Look to state law; If state law corp = corp for tax 7701-2(b) b. One Member: Corp or DRE 7701-2(a) i. Default = Disregarded entity 7701-3(b)(1)(ii) 1. If state law corp = corp for tax 7701-2(b) 2. SMLLC can’t be Pship = DRE III. Reclassification a. 7701-3(g) Election to Convert PS to Corp for Tax i. No tax ii. Deemed contribution of pship assets to corp, followed by liquidation b. PTPs: taxed as corporations i. PTP – publicly traded partnership. 7704 c. Election to Convert Corp to PS i. Deemed liquidation and trigger tax at that time d. Add member to single member corp of LLC and subject to PS tax rules e. Lose member and become single member, then DRE LLC | GP | LP | C-Corp | S-Corp | | Annual registrationForeign State qualificationStatutory organization and formationAnnual stockholders and directors meetings in corporations (not in LLC) Check | No statutory formation process. May inadvertantly form and have vicarious...
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