Questions and Answers
Which type of business entity reports business income on a partnership tax return?
What type of income is generated from the sale of assets, such as equipment or real estate?
Which type of expense is related to wear and tear on assets, such as equipment and buildings?
What is the purpose of the General Business Credit?
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Which accounting method recognizes income and expenses when earned or incurred?
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What is the range of a fiscal year?
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Which type of business entity reports business income on a corporate tax return and shareholders report dividends on their individual tax return?
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Which type of income is generated from rents, royalties, and partnerships?
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Which type of tax is levied on specific goods and services?
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Which of the following business entities is taxed at the corporate level and then again at the individual level?
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What is the purpose of the At-Risk Rules?
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Which of the following expenses is expected to last more than one year?
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What is the type of loss that can be carried back or forward to offset income in other tax years?
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Which tax credit is available to businesses that incur expenses for research and development?
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What is the type of tax that is levied on business property?
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Which type of income is taxed at the individual level for pass-through entities?
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Study Notes
Business Taxation
Entity Types
- Sole Proprietorship: Business income reported on individual tax return (Form 1040)
- Partnership: Business income reported on partnership tax return (Form 1065); individual partners report share of income on individual tax return (Form 1040)
- S Corporation: Business income reported on corporate tax return (Form 1120S); shareholders report share of income on individual tax return (Form 1040)
- C Corporation: Business income reported on corporate tax return (Form 1120); shareholders report dividends on individual tax return (Form 1040)
Business Income
- Ordinary Income: Income from operations, including sales, services, and interest
- Capital Gains: Income from sale of assets, such as equipment, real estate, or investments
- Passive Income: Income from rents, royalties, and partnerships
Business Expenses
- Ordinary and Necessary Expenses: Expenses directly related to business operations, such as salaries, rent, and supplies
- Depreciation and Amortization: Expenses for wear and tear on assets, such as equipment and buildings
- Travel Expenses: Expenses for business-related travel, including transportation, lodging, and meals
Tax Credits
- General Business Credit: Credit for business expenses, such as research and development, and small business health care tax credit
- Earned Income Tax Credit (EITC): Credit for low-income workers, including self-employed individuals
Accounting Methods
- Cash Method: Recognize income and expenses when received or paid
- Accrual Method: Recognize income and expenses when earned or incurred
- Hybrid Method: Combination of cash and accrual methods
Tax Year
- Calendar Year: January 1 to December 31
- Fiscal Year: Any 12-month period ending on the last day of any month except December 31
Business Taxation
Entity Types
- Sole Proprietorship: Business income is reported on the individual tax return (Form 1040).
- Partnership: Business income is reported on the partnership tax return (Form 1065), and individual partners report their share of income on their individual tax return (Form 1040).
- S Corporation: Business income is reported on the corporate tax return (Form 1120S), and shareholders report their share of income on their individual tax return (Form 1040).
- C Corporation: Business income is reported on the corporate tax return (Form 1120), and shareholders report dividends on their individual tax return (Form 1040).
Business Income
- Ordinary Income: Includes income from operations, such as sales, services, and interest.
- Capital Gains: Includes income from the sale of assets, such as equipment, real estate, or investments.
- Passive Income: Includes income from rents, royalties, and partnerships.
Business Expenses
- Ordinary and Necessary Expenses: Include expenses directly related to business operations, such as salaries, rent, and supplies.
- Depreciation and Amortization: Include expenses for wear and tear on assets, such as equipment and buildings.
- Travel Expenses: Include expenses for business-related travel, including transportation, lodging, and meals.
Tax Credits
- General Business Credit: Applies to business expenses, such as research and development, and small business health care tax credit.
- Earned Income Tax Credit (EITC): Applies to low-income workers, including self-employed individuals.
Accounting Methods
- Cash Method: Recognizes income and expenses when received or paid.
- Accrual Method: Recognizes income and expenses when earned or incurred.
- Hybrid Method: Combines cash and accrual methods.
Tax Year
- Calendar Year: Runs from January 1 to December 31.
- Fiscal Year: Any 12-month period ending on the last day of any month except December 31.
Business Taxation
Types of Business Taxes
- Income tax is levied on business income, including profits and capital gains.
- Self-Employment tax is imposed on net earnings from self-employment, covering Social Security and Medicare taxes.
- Employment taxes are withheld from employees' wages, consisting of Social Security, Medicare, and federal income taxes.
- Excise taxes are imposed on specific goods and services, such as gasoline, tobacco, and alcohol.
- Property taxes are levied on business property, including real estate and personal property.
Business Income Taxation
- Pass-Through Entities, including partnerships, S corporations, and Limited Liability Companies (LLCs), have income taxed only at the individual level.
- C Corporations have income taxed at the corporate level, and then again at the individual level when distributed as dividends.
- Most businesses are required to file tax returns on a calendar year basis, known as the Tax Year.
- The accounting method used can be either the cash method or the accrual method, with most businesses required to use the accrual method.
Business Expenses and Deductions
- Ordinary and Necessary Expenses are common and accepted in the business, including salaries, rent, and supplies.
- Capital Expenditures are expected to last more than one year, such as equipment and buildings.
- Depreciation is a deduction for the decrease in value of capital expenditures over time.
- Amortization is a deduction for the decrease in value of intangible assets, like patents and copyrights.
Business Losses
- A Net Operating Loss (NOL) can be carried back or forward to offset income in other tax years.
- Passive Losses result from passive activities, such as rental income or limited partnerships, and can only be used to offset passive income.
- At-Risk Rules limit the amount of loss that can be claimed, based on the amount of money invested in the business.
Tax Credits and Incentives
- The Research and Development (R&D) Credit is granted to businesses incurring expenses for research and development.
- The Work Opportunity Tax Credit (WOTC) is awarded to businesses hiring employees from targeted groups.
- The Small Business Health Care Tax Credit benefits small businesses providing health insurance to employees.
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Description
Learn about the different types of business entities and how they report income for tax purposes. This quiz covers sole proprietorships, partnerships, S corporations, and C corporations.
