Part 2 - Businesses - Types Of Businesses
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
Your ClientsGay married couples can now file joint federal and state returns, but they should know how the marriage penalty in the tax code works.
RetirementIf you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
Your ClientsTaxpayers who know the rules for netting gains/losses can generate additional losses to net against the taxable gains in their portfolios. Here's how.
EconomicsIf the governments of tax haven countries impose little, or no, income taxes, how exactly do these nations generate revenue?
Tax StrategyPaintings, oil wells and yachts can get great tax write-offs for their wealthy owners. All it takes is some smart gaming of the tax code.
Your ClientsHere is how clients may be impacted by some of the issues brought to light by the Panama Papers.
TaxesNot enough cash on hand for your April tax bill? No need to panic. Here's what to do.
Taxes5 tax resolutions to start on right now for a smoother tax return next April 18. Yes, it's the same date in 2017.
TaxesMost important: Do it now.
Home & AutoMoving to a state with different tax rules can be very tempting. Here are some things you should consider before moving for tax purposes.
Skinny down distribution is corporate practice of slimming down ...
A series of transactions that could have been treated as a single ...
A borrowing expense that a taxpayer can claim on a federal or ...
A tax credit offered to low-income individuals working in the ...
Substantiation required by the Internal Revenue Service for a ...
A charitable donation for which the donor receives something ...
Learn how long you need to save your tax records to avoid getting hit by additional taxes and penalties if you are the target ... Read Answer >>
Paying taxes is an unavoidable obligation each year, but individuals and business owners can take advantage of various strategies ... Read Answer >>
Learn how contributions from a Flexible Spending Account (FSA) are not subject to taxation; however, the expenses paid from ... Read Answer >>
Having the right information available when the IRS calls can save you considerable time, money and stress. Learn how long ... Read Answer >>
Find out whether the actual expense of dental insurance premiums can be deductible on your income taxes, and learn about ... Read Answer >>
Find out whether interest on personal loans is tax deductible and what types of loan interest can be used to reduce your ... Read Answer >>