Pass-through entities
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders. See the instructions for Form 2553 for all required information and to determine where to file the form.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
How is income from an S-Corp taxed?
Form 1120S (Tax return for an S-Corp and Form 1065 (Schedule K1) for Partnership.
1120S Instructions and K1 Instructions
A corporation or other entity must file Form 1120S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. After filing Form 2553, you should have receive confirmation that Form 2553 was accepted. If you did not receive notification of acceptance or nonacceptance of the election within 2 months of filing Form 2553 (5 months if you checked box Q1 to request a letter ruling), take follow-up action by calling 1-800-829-4933. Do not file Form 1120S for any tax year before the year the election takes effect.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations
Owner employee compensation received is on W2
How are partnerships taxed?
Form 1065 is an information return used to report the income, gains, losses, deductions, credits, etc., from the operation of a partnership. A partnership does not pay tax on its income but “passes through” any profits or losses to its partners. Partners must include partnership items on their tax or information returns.
A partnership is the relationship between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made. The term “partnership” includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that is not, within the meaning of the regulations under section 7701, a corporation, trust, estate, or sole proprietorship. A joint undertaking merely to share expenses is not a partnership. Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists. Business owned and operated by spouses. Generally, if you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership and you must file Form 1065.
Form 1065 US return of Partnership Income
How are LLC’s taxed?
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And 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.
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Limited-Liability-Company-LLC
Personal tax return / K1 / basis increased + decreased.
Publication 541 Page 9 Right
Distribution is generally tax free to the extent of any basis you have.
What is a pass through entity?
Sole proprietorships, partnerships, LLCs and S corporations are pass-through entities for federal income tax purposes. This means these entities are not subject to income tax. Rather, the owners are directly taxed individually on the income, taking into account their share of the profits and losses.
How do I read a Schedule K-1?
Determine which version of Schedule K-1 you wish to use. K-1 forms for Form 1120S (S corporation tax return), Form 1065 (partnership tax return) and Form 8865 (foreign partnership return) differ significantly. An LLC with more than one member will be taxed as a domestic partnership using Form 1065 unless it elects to be taxed as a corporation. LLCs electing to be taxed as S corporations must file Form 1120S with Schedule K-1.
Calculate the business's total income. Subtract deductible expenses such as payroll and advertising expenses to arrive at net profits or losses. Different types of net profits or losses will have to be broken down into various income components - business income, interest income, rental income, etc.
Do not rely on pre-existing company financial statements, because profits or losses might be different when calculated for tax purposes than they are when calculated for company financial statements.
Determine the ownership share and profit or loss allocation percentage of each shareholder, partner or member. Remember that the allocation of profits or losses to LLC members need not be equal to ownership shares if the LLC operating agreement provides otherwise. This means that you will have to check the LLC operating agreement (if any) to confirm the allocation of profits or losses.
Multiply the business's total profit or loss by the fractional allocation attributable to each shareholder, partner or member, in order to determine the individual allocation of of profits or losses. Record the result on Schedule K-1.
Append Schedule K-1 to your company's tax return, file it with the IRS, and send a copy of Schedule K-1 to each shareholder, partner or member.
http://www.ehow.com/how_5802056_understand-k_1-taxes.html
What types of retirement plans can an S-Corp have?
401(k) Plan Contributions / SEP (based on 25% W2 wages + 25% of gross income if you are the owner not above compensation limit) / Simple IRA
If you are a common-law employee of the S corporation:
You can make salary deferral contributions ($18,500) to the 401(k) plan based on your Form W-2 compensation; and your employer can make matching or non-elective contributions to the plan based on your Form W-2 compensation as a common-law employee. Salary deferral and employer contributions (matching and non-elective) are based on annual limits subject to cost-of-living adjustments (55k for 2018).
Contributions to a Self-Employed Plan
You can’t make contributions to a self-employed retirement plan from your S corporation distributions. Although, as an S corporation shareholder, you receive distributions similar to distributions that a partner receives from a partnership, your shareholder distributions aren’t earned income for retirement plan purposes (see IRC section 1402(a)(2)). Therefore, you also can’t establish a self-employed retirement plan for yourself solely based on being an S corporation shareholder.
http://www.irs.gov/Retirement-Plans/Retirement-Plan-FAQs-Regarding-Contributions-S-Corporation
Is income from S-Corp subject to payroll tax?
Only the wages (W2) and not the profits (K1) assuming you are paying yourself a reasonable wage.
Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
http://www.irs.gov/uac/Wage-Compensation-for-S-Corporation-Officers
Can you offset passive losses with passive gains from 2 separate publicly traded partnerships?
You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively.