Treatment of Income and Expenses
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Proprietorship
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Partnership
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LLC
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Regular Corporation
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S-Corporation
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Character of Income and deductions
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Tax attributes are reflected in the individual’s return, and maintain their identity
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Conduit -no tax to partnership
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Conduit -no tax to LLC
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Taxed at corporate level
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Conduit -could be passive income. Potential corporate built-in gains.
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Capital Gain
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Taxed at individual level
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Conduit -taxed at the partner level
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Conduit -taxed to member
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Taxed at corporate level
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Possible built-in gains tax; conduit -taxed at the shareholder level.
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Capital Loss
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Limited to $3,000 per year; excess is carried forward indefinitely. Losses offset ordinary income on a dollar-for-dollar basis
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Conduit -limitations apply at the partner level
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Conduit -limitations apply at the member level
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Carry back three years and carry over five years as short-term capital loss offsetting only capital gains
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Conduit -limitations apply at the shareholder level.
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Section 1231 gains and losses
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Taxed at the individual level, combined with other Section 1231 gains or losses of individual; net gains are capital; net losses are ordinary.
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Conduit -limitations apply at the partner level; taxed as ordinary income.
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Conduit -limitations apply at the member level; taxed as ordinary income.
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Taxable or deductible at the corporate level.
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Possible corporate built-in gains tax; conduit -limitations apply at the shareholder level; taxed as ordinary income.
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Expensing of depreciable business assets under Section 179
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Election to expense is allowed up to $20,000.00 in 2000. Expensing allowance phases out dollar for dollar when the cost of qualified property placed in service during the taxable year exceeds $200,000.
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Same
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Same
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Same
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Same
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Organization Costs
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Not amortizable
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Amortizable over 60 months
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Amortizable over 60 months
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Amortizable over 60 months
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Amortizable over 60 months
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Charitable costs
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Subject to limits for individual; Generally, gifts to public charity, cash 50% of AGI; appreciated property, 30% of AGI. Other limitations for specific items contributed. Unused portion may be carried forward five years.
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Conduit -limitations apply at the partner level.
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Conduit -limitations apply at the member level.
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Deduction is limited to 10% of modified taxable income. Unused portion may be carried forward five years.
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Conduit -limitations apply at the shareholder level.
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Dividends received
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Treated as ordinary income; no exclusion or deduction. Portfolio taint retained.
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Conduit with portfolio taint retained.
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Conduit with portfolio taint retained.
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70% to 100% dividend received deduction. Special rules on portfolio income for closely-held corporations.
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Conduit with portfolio taint retained.
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Alternative minimum tax
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For individuals the AMT is 26% and 28% . The exemption amount is determined by filing status and alternative minimum taxable income.
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Conduit for preference items. The AMT is calculated at the partner level.
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Conduit for preference items. The AMT is calculated at the member level.
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For corporate taxpayers, AMT rate is 20%. The AMT is imposed on alternative minimum taxable income in excess of $40,000, minus 25% of the amount of AMTI exceeding $150,000 but only if the amount is more than the regular corporate tax. AMT may be applied as a credit against future regular tax.
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Conduit for preference items. The AMT is calculated at the shareholder level.
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Tax preferences
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Depletion, accelerated depreciation, excess drilling costs, among others.
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Conduit -preference items separately stated and reflected in the calculation of AMT at the partner level. No adjusted current earnings (ACE) adjustment.
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Conduit -preference items separately stated and reflected in the calculation of AMT at the member level. No adjusted current earnings (ACE) adjustment.
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Adjusted current earnings (ACE) adjustment, depletion, accelerated depreciation, among others.
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Conduit -preference items separately stated and reflected in the calculation of AMT at the shareholder level. No ACE adjustment.
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Accounting Methods
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Cash or accrual
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Cash or accrual, but partnership with C corporation partners with more than $5 million gross receipts and tax shelter partnerships cannot use cash method.
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Cash or accrual, but LLC with C corporation members with more than $5 million gross receipts and tax shelter LLC’s cannot use cash method.
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Accrual, but cash available to C corporations with $5 million or less gross receipts.
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Cash or accrual.
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Partner’s or shareholders “reasonable” salary.
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Not applicable.
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Can be deductible by partnership or treated as an allocation of partnership profits.
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Can be deductible by LLC or treated as an allocation of LLC profits.
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Deductible by the corporation and taxable to the shareholder-employee.
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Deductible by the corporation and taxable to the shareholder-employee.
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Group hospitalization and life insurance premiums and medical reimbursement plans.
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Medical expenses are an itemized deduction. Only medical expenses exceeding 7.5% of adjusted gross income will be deductible. Self-employed individuals can deduct up to 30% of their medical insurance premiums for 1996 (40% for 1997 and 45% for 1998) unless they are covered by a qualified plan. No deduction is allowed for life insurance premiums.
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Cost of partner’s benefits generally not deductible by partnership. May be treated as a distribution to individual partners, eligible for possible deduction at partner level. Partners can deduct up to 60% of their medical insurance premiums for 2000 unless they are covered by a qualified plan.
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Cost of member’s benefits generally not deductible by LLC. May be treated as a distribution to individual members, eligible for possible deduction at member level. Members can deduct up to 60% of their medical insurance premiums for 2000 unless they are covered by a qualified plan.
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Cost of shareholder employee’s coverage is generally deductible as a business expense if the plan is a qualified plan “for the benefit of employees.”
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Same as partnership for more than 2% shareholders, including eligibility to deduct up to 60% of their medical insurance premiums.
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Allocations, Distributions, and Loss Limitations
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Proprietorship
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Partnership
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LLC
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Regular Corporation
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S Corporation
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Basis of allocating operating income or loss to owners.
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All income or loss picked upon owner’s return.
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Partnership profit and loss agreement (may have “special allocations” of income and deductions if they reflect economic reality).
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LLC operating agreement (may have “special allocations” of income and deductions if they reflect economic reality).
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No income allocated to stock holders.
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Pro-rata portion of income or loss and separately stated items, based on per share, per day allocation.
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Distribution to owners.
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Drawings from the business are not taxable; the net profits are taxable; and the proprietor is subject to the tax on self-employment income.
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Generally not taxable.
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Generally not taxable.
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Payment of salaries are deductible by corporation (subject to $1 million limit for publicly held companies) and taxable to recipient; payment of dividends are not deductible by corporation and generally are taxable to recipient shareholders.
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Payments of salaries deductible by corporation and taxable to recipient; distributions generally not taxable.
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Limitations on losses deductible by owners.
basis at-risk passive loss. |
*Not applicable
*Limited to amount at-risk *Passive loss limitations apply to owner. |
*Limited to Member’s basis (including entity debt)
*Limited to amount at-risk *Passive loss limitation apply at the partner level. |
*Limited to Member’s basis (including entity level debt)
*Limited to amount at-risk *Passive loss limitation apply at the member level. |
*No losses allowed to individual, except upon sale of stock or liquidation of the corporation.
*Certain closely-held corporations subject to passive loss limitations. |
*Limited to shareholder’s basis (contribution s to capital plus loans to corporation).
*Limited to amount at risk. *Passive loss limitations apply at the shareholder level. |
Structure of Ownership
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Proprietorship
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Partnership
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LLC
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Regular Corporation
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S Corporation
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Formal election required.
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No.
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No, but a partnership agreement should be drafted.
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Must meet state and LLC requirements.
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Must incorporate under state law.
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Yes.
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Qualified owners.
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Individual ownership.
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No limitation.
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No limitation.
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No limitation.
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Individual citizens, resident aliens, estates and certain trusts may be shareholders. Number of shareholders limited to 75 (35 for tax years beginning before 1997). After 1997 certain tax-exempt organizations may be members.
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Type of ownership interest.
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Assets of business transferable rather than business itself.
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Consent of other partners often required if partnership interest is to be transferred, depending upon partnership agreement. New partnership may be created.
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Consent of other members often required if LLC interest is to be transferred, depending upon LLC agreement.
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Ready transfer of ownership through the use of stock certificates; restrictions may be imposed by shareholder’s agreement.
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Shares can be transferred only to certain types of shareholders (see above). No consent is needed by a new shareholder for S Election.
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Taxable year
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Usually calender year.
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Must have a calender year unless there is a business purpose, i.e., a natural business year.
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Must have a calender year unless there is a business purpose, i.e., a natural business year.
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Any year is permissible upon adoption; changes require business purposes. Special rules apply to personal service corporations.
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Must have a calendar year unless there is a business purpose, i.e., a natural business year.
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Flexibility
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No restrictions.
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Partnership is contractual arrangement, within which partners can do in business what individuals can, subject to the partnership agreement and applicable state laws.
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LLC is contractual arrangement, within which members can do in business what individuals can, subject to the LLC agreement and applicable state laws.
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Corporation is a creature of the sate functioning with powers granted explicitly or necessarily implied, subject to judicial construction and decisions.
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Same as regular corporation.
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Capital requirements.
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Capital raised only by loan or increased contribution by proprietor.
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Loans or contributions from partners (original, or newly created by remaking partnership).
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Loans or contributions from members (original, or newly created by remaking LLC).
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Met by sale of stock, issuance of bonds, or by taking on other corporate debt.
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Met by sale of stock or issuance of debt, but corporation can issue only one class of stock and is limited to 35 shareholders.
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General Liability
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Proprietorship
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Partnership
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LLC
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Regular Corporation
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S Corporation
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Business Action
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Individual is liable on all liabilities of the business. Sole proprietor makes decisions and can act immediately.
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General partners individually liable on partnership liabilities. Limited partners liable only up to amount of his or her unpaid capital contributions, plus distributions in the last year (in many states). Action dependent upon the agreement of partners or general partners, as defined in the partnership agreement.
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Members liability limited to capital contributions. Action dependent upon the agreement of members, as defined in the operating agreement.
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Shareholder’s liability limited to capital contributions. Unity of action based on authority of board of directors.
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Same as regular corporation, except unanimous consent is required to elect S corporation status, more than 50% of shareholders needed to revoke. S status, however, can be revoked by failure to meet requirement s.
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Management
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Proprietor is responsible and recognizes all profits and losses.
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Except for limited or silent partners, investment in partnership involves responsibility for management decisions.
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May be member managed or manager managed.
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Shareholder can receive dividends without sharing in responsibility for management.
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Shareholders entitled to allocable shares of income and income items without responsibility for management decisions.
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