This section includes facts regarding various types of business entities and their filing requirements. A "business" is an organization or enterprising entity engaged in commercial, industrial or professional activities. A business can be a for-profit entity, such as a publicly-traded company, or a non-profit organization that is granted tax-exempt status by the IRS. Nonprofits are also called 501(c)(3) organization after the section of the tax code that provides for the non-profit status. Even though non-profits do not pay income tax on the money they earn from fundraising activities or donation, they are still required to file an annual return.
A business's structure will determine its filing requirements, taxes treatment and liability. As an Enrolled Agent, you will need a thorough understanding of the various business structures, the filing requirements for businesses and other details, including:
- Types of business entities – corporations, farmers, limited liability companies, nonprofits, partnerships and S corporations
- Employment taxes – social security, Medicare, Federal income tax withholding, Federal unemployment (FUTA) tax
- Filing requirements for the different business entities
- Employer identification number – EIN
- Accounting periods – tax year
- Accounting methods
A partnership is a business organization in which at least two individuals manage and operate the business. All owners are equally and personally liable for the debts of the business. Each partner contributes money, property, labor or skill, and shares in both the profits and losses of the business. A partnership is required to file an annual information return to report the income, deductions, gains, losses and other information from its business operations. Rather than paying any taxes, a partnership "passes through" any profits or losses to its partners. The partners report their share of the partnership's income or loss on their individual tax returns. Because partners are not considered employees, they should not be issued Form W-2 to report earnings; rather, the partnership must furnish to each partner a Schedule K-1 (Form 1065, U.S. Return of Partnership Income) by a specific date.
As an Enrolled Agent, you will need to be familiar with the structure and details of partnerships, detailed in IRS Publication 541 "Partnerships", including:
- Basis of partner's interest – adjusted bases, effect of partnership liabilities
- Disposition of partner's interest – sale, exchange or other transfer; payments for unrealized receivables and inventories, liquidation upon partner retirement or death
- Partnership distributions – partner's gain or loss, partner's basis for distributed property
- Partnership income, expenses, distributions and flow-through
- Partnership returns – Form 1065, U.S. Return of Partnership Income
- Transactions between partners and partnership – sale or exchange of property, guaranteed payment, contribution or property, contribution of services
- Partnership formation - partnership agreement, general vs. limited partners, capital contribution
- Dissolution of partnership - sale, death of partner
- Filing requirements and due dates
- Services rendered in return for partnership interest
- Debt discharge
Corporations in General
A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy similar rights and responsibilities as individuals: corporations can enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. A corporation's limited liability is one of its most important features. Shareholders have the right to participate in the profits but are not held personally liable for the company's debts.
A corporation is created by a group of shareholders who have ownership of the corporation. They elect a board of directors who appoint and oversee management of the corporation. Enrolled Agents should be familiar with the structure and filing requirements of corporations, as well as other pertinent details that are detailed in IRS Publication 542 "Corporations" including:
- Filing requirements and due dates
- Income, deductions and special provisions
- Liquidation and stock redemptions
- Shareholder dividends – definition, reporting requirements, etc.
- Special deductions – dividends, charitable deductions, etc.
- Accumulated earnings
- Estimated tax payments
Forming a Corporation
Prospective shareholders exchange money, property or both in forming a corporation. A corporation conducts business, realizes net income/loss, pays taxes and distributes profits to shareholders, and can typically take the same deductions as a sole proprietorship to figure its taxable income.
In addition to understanding the structure and filing requirements for corporations, Enrolled Agents must also understand how corporations are formed and funded. Relevant topics to know include:
- Services rendered to a corporation in exchange for stock
- Internal Revenue Code 351 exchange
- Transfer and receipt of money or property
- Transfer of mortgaged property
- Controlled groups
- Closely held corporations
- Personal service corporations
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through shareholders. Shareholders of S corporations report the flow-through of income and losses on their individual tax returns. Each shareholder is taxed at his or her particular income tax rate. To qualify for S corporation status, the corporation must meet these requirements:
- Be a domestic corporation
- Be an eligible corporation (not certain financial institutions, insurance companies, and domestic international sales corporations)
- Have a maximum of 100 shareholders
- Have only allowable shareholders – individuals, certain trusts and estates (no partnerships, corporations or nonresident alien shareholders)
To become an S corporation, the corporation must submit Form 2553 "Election by a Small Business Corporation." The form must be signed by all of the shareholders to be valid. As an Enrolled Agent, you will be required to understand details regarding S corporations, including:
- Debt discharge
- Non-cash distributions
- S corporation election (Form 2553, Election by a Small Business Corporation)
- S corporation status – active, terminated, reinstated
- Shareholder's basis
- Shareholders' taxes (Form 1040 Schedule E, Supplemental Income and Loss)
- Tax treatment of distributions
- Election procedure
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