Question: What is a partnership? What is a limited partnership, what is a general partnership? How is risk allocated in partnerships?
Answer: A partnership is an unincorporated organization of two or more members, that is involved in trade or business with the intent to make profits. A general partnership is composed of general partnerships, who are each personally liability for any liabilities arising from the course of activity.
A limited partnership is formed under the articles of state partnership law and consist of at least one general partner and one limited partner. The limited partners, according to law, have partnership risk limited to only their investment in the partnership. The general partner carries unlimited risk.
With partnerships, income flows through the 1065, (partnership tax form) to be taxed at the individual partners rate. It is referred to as a passthrough entity because the tax liability pass through the partnership, to each pro-rata partner's share. For instance, a general partnership has 2 partners. If each own 50%, and the partnership makes $100,000 for the year, $50,000 flows throught on a K-1 to be taxed on the partners 1040's.
Tuesday, December 29, 2009
Saturday, December 26, 2009
What Are Section 1231, 1245, and 1250 Property
Question: What Are Section 1231, 1245, and 1250 Property? What are the tax effects of each?
Answer: Section 1231 property is defined as depreciable and real property (including land) that is held for more than a year. 1231 property does not include assets held for resale, such as inventory. Section 1231 tax effects provide the best of both worlds from a taxation standpoint - losses are ordinary losses and gains are considered capital gains. If the net of asset sales on 1231 property exceed cost - the gain is a capital gain. If the net is a loss - it is an ordinary loss.
1245 property, includes depreciable assets held by a business for intergral use. If the property has been depreciated, the recapture of depreciation is ordinary income, with any gain in excess of depreciation recapture considered a capital gain. For instance. If a $100,000 asset is purchased and depreciation equals $50,000, upon sale of property, the first $50,000 of gains are taxed at ordinary tax rates, and any gain in excess of purchase price is taxed as a capital gain.
1250 property includes real estate and real property subject to depreciation that is, and has not been, section 1245 property. 1250 propety is taxed similiarly to 1245 property with the recapture of depreciation. For instance if a commercial property is purchased for $1,500,000 and depreciation upon sale of property is $500,000, then the gain from $1,000,000 (adjusted basis after depreciation) is taxed a capital gains rates of 25%. If the sale price is $2,500,000 then $1,000,000 (the difference between purchase price and sale price) would be taxed at regular capital gains rates of 15%.
Answer: Section 1231 property is defined as depreciable and real property (including land) that is held for more than a year. 1231 property does not include assets held for resale, such as inventory. Section 1231 tax effects provide the best of both worlds from a taxation standpoint - losses are ordinary losses and gains are considered capital gains. If the net of asset sales on 1231 property exceed cost - the gain is a capital gain. If the net is a loss - it is an ordinary loss.
1245 property, includes depreciable assets held by a business for intergral use. If the property has been depreciated, the recapture of depreciation is ordinary income, with any gain in excess of depreciation recapture considered a capital gain. For instance. If a $100,000 asset is purchased and depreciation equals $50,000, upon sale of property, the first $50,000 of gains are taxed at ordinary tax rates, and any gain in excess of purchase price is taxed as a capital gain.
1250 property includes real estate and real property subject to depreciation that is, and has not been, section 1245 property. 1250 propety is taxed similiarly to 1245 property with the recapture of depreciation. For instance if a commercial property is purchased for $1,500,000 and depreciation upon sale of property is $500,000, then the gain from $1,000,000 (adjusted basis after depreciation) is taxed a capital gains rates of 25%. If the sale price is $2,500,000 then $1,000,000 (the difference between purchase price and sale price) would be taxed at regular capital gains rates of 15%.
Thursday, December 24, 2009
Difference Between C Corporations and S-Corporations
Question: What is the difference between a C - corporation and an S - corporation? What are the advantages, disadvantages of each? Which is preferable for income tax purposes based on income levels?
Answer: An S- corporation is a C -corporation that has elected to be taxed as an S - corporation with the filing of a 2553. A corporation begins with the filing of the articles of incorporation and obtaining an EIN. A corporation is taxed on an 1120 tax form. With a C and S-corporation, owners have limited liabilty. However, the gain on C- corporation activities are taxed with in the C-corporation, which pay's estimated taxes, the same as an individual do with an estimated 1040 tax liability. The income net of tax is available for distributions to owners. This is the disadvantage of a C- corporation - double taxation - the income is taxed at the entity level and then again on the individual level to shareholders.
For instance if a C-corporation earns $50,000 for the year, the tax at the entity level is $7,500 based on a 15% tax bracket. The income net of tax is $42,500, which if distributed to shareholders would be taxed again as a distribution, at the shareholders rates (ranging from 0% to 35% depending on the individuals AGI). The advantage of a C- corporation is that it can have more than 100 shareholders, and can deduct fringe benefits.
A C- corporation that files a 2553 and is approved by the IRS to be taxed as an S-corporations must have fewer than 100 shareholders. The advantage of an S-corporation is that the income passes through to the owners on a K-1, similiar to a partnership. This permits the income to be taxed once - at the shareholders level only. However a S- corporation must have only one class of stock. As an S-corporation, income is also taxed with an RK-1 for PA shareholder, recorded on PA-40.
A C-corporation can begin as an operating company, and file for S-status at any time. However before making this decision, the company should consult with their CPA, relating to matters such as possible built in gain issues, as well as discuss the other related advantages and disadvantage to an S election.
In most instances, S-corporations are a better option for shareholders, if the the company has fewer than 100 shareholders, and has only one class of stock.
Answer: An S- corporation is a C -corporation that has elected to be taxed as an S - corporation with the filing of a 2553. A corporation begins with the filing of the articles of incorporation and obtaining an EIN. A corporation is taxed on an 1120 tax form. With a C and S-corporation, owners have limited liabilty. However, the gain on C- corporation activities are taxed with in the C-corporation, which pay's estimated taxes, the same as an individual do with an estimated 1040 tax liability. The income net of tax is available for distributions to owners. This is the disadvantage of a C- corporation - double taxation - the income is taxed at the entity level and then again on the individual level to shareholders.
For instance if a C-corporation earns $50,000 for the year, the tax at the entity level is $7,500 based on a 15% tax bracket. The income net of tax is $42,500, which if distributed to shareholders would be taxed again as a distribution, at the shareholders rates (ranging from 0% to 35% depending on the individuals AGI). The advantage of a C- corporation is that it can have more than 100 shareholders, and can deduct fringe benefits.
A C- corporation that files a 2553 and is approved by the IRS to be taxed as an S-corporations must have fewer than 100 shareholders. The advantage of an S-corporation is that the income passes through to the owners on a K-1, similiar to a partnership. This permits the income to be taxed once - at the shareholders level only. However a S- corporation must have only one class of stock. As an S-corporation, income is also taxed with an RK-1 for PA shareholder, recorded on PA-40.
A C-corporation can begin as an operating company, and file for S-status at any time. However before making this decision, the company should consult with their CPA, relating to matters such as possible built in gain issues, as well as discuss the other related advantages and disadvantage to an S election.
In most instances, S-corporations are a better option for shareholders, if the the company has fewer than 100 shareholders, and has only one class of stock.
Tax On The Sale Of Gold Bullion
Question: What is the tax on the sale of gold bullion held as an investment?
Answer: Gold bullion gains are taxed at the collectible rate, which is 28%. Collectibles include works of art, rugs, antiques, and metals - including gold, silver and platinum bullion - gems, stamps, coins, or alcoholic beverages. If a partnership, S-corporation, or trust has appreciated value due to collectible holdings, the gain on the sale of those entities is taxed at the collectible rate of 28%.
However, gains on the sale of corporations involving collectible production - such as a gold mining company, are taxed at the regular capital gain tax rate which depending on the shareholders AGI (adjusted gross income), may range from 0% to 35%.
Answer: Gold bullion gains are taxed at the collectible rate, which is 28%. Collectibles include works of art, rugs, antiques, and metals - including gold, silver and platinum bullion - gems, stamps, coins, or alcoholic beverages. If a partnership, S-corporation, or trust has appreciated value due to collectible holdings, the gain on the sale of those entities is taxed at the collectible rate of 28%.
However, gains on the sale of corporations involving collectible production - such as a gold mining company, are taxed at the regular capital gain tax rate which depending on the shareholders AGI (adjusted gross income), may range from 0% to 35%.
Saturday, December 19, 2009
Welcome To The Tax Department Journal
The Tax Department Journal's vision is to develop the taxation knowledge and expertise of the contributing author so as to provide expert taxation advice and counsel to businesses and individuals.
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