In a concise, well written essay, compare and contrast the differences and simil
ID: 450847 • Letter: I
Question
In a concise, well written essay, compare and contrast the differences and similarities in the entities we studied this semester (C corporations, partnerships, LLCs and S Corporations – you can include sole proprietorships if you would like but you do not have to). Please do not list them in bullet format, please compare and contrast in essay form. Include in your essay a discussion of the following:
List the advantages and disadvantages of each entity, including both tax and non-tax considerations we discussed in class.
Tax treatment of property contributions from the shareholder/member/partner to the entity upon formation including a discussion of the basis the entity would take in the contributed property and the basis the shareholder/member/owner would have in the entity as a result of the contribution. Are there differences between the entities? Why?
Tax treatment of cash and property distributions/dividends to a shareholder/member/partner. Include a discussion of the basis the shareholder/member/partner would take in the distributed property and whether the property distribution would result in gain or loss recognition.
What are E&P and AAA and what is the purpose of those calculations.
Which entities are taxed at the entity level and which offer flow through taxation? How are income and losses aggregated when they flow through to the shareholder/member/partner and why is this important? How does this affect the shareholder/member/partner’s basis in the entity (if at all)?
Explain the purpose of the built in gains tax and when it applies.
Explanation / Answer
The tax treatment of a distribution by an S corporation with accumulated E&P depends on the balance of the corporation’s accumulated adjustments account (AAA), its E&P, the stock basis of the shareholder who received the distribution, and the order in which adjustments must be made to these account balances.
(a) General rule
If for any taxable year beginning in the recognition period an S corporation has a net recognized built-in gain, there is hereby imposed a tax (computed under subsection (b)) on the income of such corporation for such taxable year.
(b) Amount of tax
(1) In general
The amount of the tax imposed by subsection (a) shall be computed by applying the highest rate of tax specified in section 11(b) to the net recognized built-in gain of the S corporation for the taxable year.
(2) Net operating loss carryforwards from C years allowed
Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed for purposes of this section as a deduction against the net recognized built-in gain of the S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules similar to the rules of the preceding sentences of this paragraph shall apply in the case of a capital loss carryforward arising in a taxable year for which the corporation was a C corporation.