Chapter 20 Tax Homework
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. 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 Sub-chapter K and consist of general partnerships, limited partnerships, and limited liability companies (LLC). S corporations are taxed under Sub-chapter S. Both these types of business entities are treated as flow-through entities and are taxed accordingly.
5. What is the rationale for requiring partners to defer most gains and all losses when they contribute property to a partnership? The rationale for requiring partners to defer most gains and losses when contributing property to a partnership is twofold. First, the IRS desires that entrepreneurs have a way to start their own business without having to pay any taxes upfront. Second, the partners are considered still owning the property they have contributed to the partnership. While they don’t own the property outright, each partner has a small percent-age of the property contributed in her/his partnership interest she/he ex-changed for. This second reasoning helps further support the idea that partnerships follow the aggregate concept.
7. What are inside basis and outside basis, and why are they relevant for taxing partnerships and partners?
An inside basis, in relation to partnerships, is the basis the partnership
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. 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 Sub-chapter K and consist of general partnerships, limited partnerships, and limited liability companies (LLC). S corporations are taxed under Sub-chapter S. Both these types of business entities are treated as flow-through entities and are taxed accordingly.
5. What is the rationale for requiring partners to defer most gains and all losses when they contribute property to a partnership? The rationale for requiring partners to defer most gains and losses when contributing property to a partnership is twofold. First, the IRS desires that entrepreneurs have a way to start their own business without having to pay any taxes upfront. Second, the partners are considered still owning the property they have contributed to the partnership. While they don’t own the property outright, each partner has a small percent-age of the property contributed in her/his partnership interest she/he ex-changed for. This second reasoning helps further support the idea that partnerships follow the aggregate concept.
7. What are inside basis and outside basis, and why are they relevant for taxing partnerships and partners?
An inside basis, in relation to partnerships, is the basis the partnership