Chapter 20
Chapter 20
Forming and Operating Partnerships
Solution Manual
Discussion Questions:
1. [LO 1] What is a flow-through entity, and what effect does this designation have on how business entities and their owners are taxed?
Flow-through entities are entities that are not taxed on the entity level; rather, these entities are taxed on the owner’s level. These types of entities conduct a regular business; however, the income earned and deductions allowed are passed to the owners of these flow-through entities, and the owners are taxed on the amount allocated to them. Thus, flow-through entities provide a way for income and deductions to be taxed only once instead of twice.
2. [LO 1] What types of business entities are taxed as flow-through entities?
The two main business entities that are taxed as flow-through entities are partnerships and S corporations. Partnerships are taxed under Subchapter K and consist of general partnerships, limited partnerships, and limited liability companies (LLC). S corporations are taxed under Subchapter S. Both these types of business entities are treated as flow-through entities and are taxed accordingly.
3. [LO 1] Compare and contrast the aggregate and entity concepts for taxing partnerships and their partners.
The aggregate concept treats partnerships more like a conglomeration of individual owners. Each partnership is viewed as an aggregation of the partners’ separate interests in the assets and liabilities of the partnership. For example, each partner, rather than the partnership, pays tax on their individual share of partnership income.
The entity concept treats partnerships more like a corporation. Each partnership is an entity separate from its partners. For example, the partnership decides on which tax method to use and which tax elections to make rather than the individual partners.
4. [LO 2] What is a partnership interest, and what specific economic rights or entitlements are
Forming and Operating Partnerships
Solution Manual
Discussion Questions:
1. [LO 1] What is a flow-through entity, and what effect does this designation have on how business entities and their owners are taxed?
Flow-through entities are entities that are not taxed on the entity level; rather, these entities are taxed on the owner’s level. These types of entities conduct a regular business; however, the income earned and deductions allowed are passed to the owners of these flow-through entities, and the owners are taxed on the amount allocated to them. Thus, flow-through entities provide a way for income and deductions to be taxed only once instead of twice.
2. [LO 1] What types of business entities are taxed as flow-through entities?
The two main business entities that are taxed as flow-through entities are partnerships and S corporations. Partnerships are taxed under Subchapter K and consist of general partnerships, limited partnerships, and limited liability companies (LLC). S corporations are taxed under Subchapter S. Both these types of business entities are treated as flow-through entities and are taxed accordingly.
3. [LO 1] Compare and contrast the aggregate and entity concepts for taxing partnerships and their partners.
The aggregate concept treats partnerships more like a conglomeration of individual owners. Each partnership is viewed as an aggregation of the partners’ separate interests in the assets and liabilities of the partnership. For example, each partner, rather than the partnership, pays tax on their individual share of partnership income.
The entity concept treats partnerships more like a corporation. Each partnership is an entity separate from its partners. For example, the partnership decides on which tax method to use and which tax elections to make rather than the individual partners.
4. [LO 2] What is a partnership interest, and what specific economic rights or entitlements are