Jane and Joe plan to go into business together. They plan to incorporate the business. What tax issues should they consider when deciding whether or not to elect S corporation status?
• Are their individual marginal tax rates lower or higher than a C corporation's marginal tax rates?
• Do they anticipate profits or losses in the first few years of business?
• Will the corporation generate any capital gains or losses?
• Do they plan to withdraw money from the corporation?
• Will they want or need fringe benefits?
• Do they plan to use a calendar year end or a fiscal year end?
S corporations generally are exempt from taxation. Income flows through and is taxed to the shareholders. The shareholders' marginal tax rates may be lower than a C corporation's marginal tax rate. Losses flow through to shareholders and can be used to offset income earned from other sources unless limitations apply. This feature is particularly important to corporations just beginning their operations. Passive loss and basis rules may limit loss deductions to shareholders. Because income, loss, and other pass-through items retain their character when they flow through to the shareholders, individual shareholders are taxed on capital gains as though the individual earned the gains. An individual may be able to offset those gains with capital losses from other sources or have them taxed at the appropriate capital gain tax rate. Shareholders generally can contribute money to or withdraw money from an S corporation without gain recognition. Shareholders are taxed only on the annual income of the S corporation. Corporate profits are taxed only at the shareholder level. Shareholders are taxed on all of an S corporation's current year profits whether those profits are distributed or not. Tax-free corporate fringe benefits generally are not available to S corporation shareholders who are employed by the business. Fringe benefits provided by an S corporation are deductible by the corporation and taxable to the shareholder. S corporations generally cannot defer income by choosing a fiscal year for the S corporation other than a calendar year unless the S corporation can establish a business purpose for a fiscal year or unless it makes a special election.
You might also like to view...
A well-designed purchase order is an example of a
a. preventive control b. detective control c. corrective control d. none of the above
Cadbury's "Sports for Schools" promotion offered sports and fitness equipment for schools in exchange for vouchers
The problem was that the public and media saw a perverse incentive for children to eat more chocolate, a product associated with obesity. Which of the following best summarizes Cadbury's problem? A) Customers felt that the cause was not in sync with the company's brand image. B) Consumers did not value the cause Cadbury was promoting. C) Customers questioned the link between the product and the cause and saw the firm as self-serving and exploitive. D) Consumers resented being sold an inferior product on the back of a cause-marketing program. E) Consumers felt that the campaign did not make a sufficient attempt to change the target audience's behavior.
What is the point of difference between illegal gratuity and bribery scheme?
a. Compared to illegal gratuities, briberies occur relatively infrequently and are usually quite small. b. Illegal gratuities do not necessarily involve an intent to influence a business decision but rather to reward someone for making a favorable decision. c. Illegal gratuities usually involve the use of actual or threatened force, fear, or economic duress. d. Illegal gratuities are made before deals are approved.
The benefits of the object-oriented approach to systems design include all of the following except
a. this approach does not require input from accountants and auditors b. development time is reduced c. a standard module once tested does not have to be retested until changes are made d. system maintenance activities are simplified