Tax Education: Business Entities Overview

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Questions and Answers

What type of payments are generally exempt from Form 1099 reporting requirements?

Payments to corporations (correct)

Payments made to sole proprietors

Payments made by credit card

Payments for personal services

Which forms should be used for payments made in the course of a trade or business?

Form 1099-MISC and Form 1098-T

Form 1099-K and Form 1098

Form 1099-MISC and Form 1099-NEC (correct)

Form 1099-K and Form 1099-NEC

In what scenario is a personal payment reportable on Form 1099?

When the payment is cash

When it exceeds $600

When it is made to a contractor for business work

There is no personal payment reportable on Form 1099 (correct)

Which entity is responsible for reporting credit card payments on Form 1099?

The payment processing entity Signup and view all the answers

What is the current reporting threshold for receiving a Form 1099-K?

$20,000 in gross earnings and 200 transactions Signup and view all the answers

When is a Form 1099-NEC required to be issued?

For payments made for business expenses Signup and view all the answers

Who generally receives a Form 1099-K among rideshare drivers?

Drivers who provided more than 200 rides and earned over $20,000 Signup and view all the answers

What type of payments should not be included on Form 1099-MISC?

Payments made by credit card Signup and view all the answers

What is the primary purpose of forming a Limited Liability Partnership (LLP)?

To provide limited liability protection to each partner Signup and view all the answers

Which professionals are typically prohibited from forming an LLC in states like California or New York?

Doctors, CPAs, and attorneys Signup and view all the answers

What is required for partners in an LLP to file for tax purposes?

Form 1065 Signup and view all the answers

In an LLP, who is generally at risk for malpractice and liability?

The individual partner responsible for their own malpractice Signup and view all the answers

What is often the status of a small business operated by spouses without formal agreements?

Partnership by default Signup and view all the answers

Who typically registers an LLP in California?

The Secretary of State Signup and view all the answers

What is a notable feature of an LLP compared to a general partnership?

Partners are protected from debts and malpractice Signup and view all the answers

Which of the following statements is NOT true about Limited Liability Partnerships?

LLPs are required to file an annual corporate tax return Signup and view all the answers

What requirement must David and Jackie fulfill due to their business classification as a hotel?

File a partnership return Signup and view all the answers

What entity must generally be filed to form a limited partnership (LP) in many states?

Certificate of Limited Partnership Signup and view all the answers

What is the primary risk limitation for a limited partner in a partnership?

Their risk is limited to their investment amount Signup and view all the answers

Which of the following statements about limited partners is true?

They may not represent the business before the IRS Signup and view all the answers

What distinguishes a limited partnership (LP) from a general partnership (GP)?

LPs require state filing, unlike GPs Signup and view all the answers

Which of the following best describes Cindy's role in the partnership with Tyler?

Limited partner with no management role Signup and view all the answers

How do limited partners typically contribute to a partnership?

By providing capital without additional obligations Signup and view all the answers

What is required for a limited partner regarding participation in the partnership's management?

Limited involvement in management activities Signup and view all the answers

What is not a category of worker classification mentioned?

Remote worker Signup and view all the answers

What is the time frame within which Form 8300 must be filed after receiving cash over $10,000?

15 days Signup and view all the answers

Which type of worker may be issued a Form W-2 while also reporting income on Schedule C?

Statutory employee Signup and view all the answers

Which of the following types of payments are considered 'cash' for the purpose of Form 8300?

Cashier’s checks Signup and view all the answers

Which of the following is a characteristic of statutory employees?

Their employers treat them as employees for Social Security tax purposes. Signup and view all the answers

Which group of workers falls under statutory nonemployees?

Direct sellers Signup and view all the answers

What is the purpose of a written statement regarding Form 8300?

To provide customers with transaction details Signup and view all the answers

Which transaction would require a business to file Form 8300?

A $15,000 payment for office furniture by a company Signup and view all the answers

What is a primary tax characteristic of statutory nonemployees?

They file taxes as self-employed individuals. Signup and view all the answers

Which of the following is true about the payments made to independent contractors?

Payments do not require tax reporting by the business. Signup and view all the answers

When must the written statement be sent to customers for filed Form 8300?

By January 31 of the following year Signup and view all the answers

Which category includes commissioned truck drivers as statutory employees?

Salespeople Signup and view all the answers

Which of the following statements about reporting requirements under Form 8300 is accurate?

Multiple related transactions totaling above $10,000 must be reported. Signup and view all the answers

In which scenario is Form 8300 not required?

An individual sells a personal item for $10,500. Signup and view all the answers

What should be checked in box 13 of Form W-2 for a statutory employee?

Statutory employee Signup and view all the answers

Which of the following is true regarding cash transactions over $10,000?

Foreign cash also counts towards the $10,000 threshold. Signup and view all the answers

What is the tax liability of a C corporation regarding its shareholders?

After-tax profits can be taxed again as taxable income to shareholders. Signup and view all the answers

Which of the following best describes the tax treatment of an S corporation?

S corporations do not pay federal income tax and pass income to shareholders. Signup and view all the answers

What significant change regarding C corporation taxation was made by the Tax Cuts and Jobs Act?

It established a flat tax rate of 21% for all C corporations. Signup and view all the answers

Which situation describes how a limited liability company (LLC) can be taxed?

An LLC may be treated as a disregarded entity, corporation, or partnership. Signup and view all the answers

What tax benefits does a C corporation enjoy in comparison to sole proprietorships?

C corporations can take special deductions not available to sole proprietorships. Signup and view all the answers

Which type of tax return must a C corporation file to report its income and losses?

Form 1120. Signup and view all the answers

How is a C corporation's after-tax profit treated when distributed as dividends?

It is taxable income for shareholders. Signup and view all the answers

What is one potential tax responsibility of an S corporation?

It may have tax liabilities on built-in gains and passive investment income. Signup and view all the answers

Study Notes

Tax Education Center

Testing Season: 2021-2022
Instructor: Standley Tilerin, EA
Topic: New Tax Law Topics, Part Two

Unit 1: Business Entities and Requirements

Sole Proprietorships

Not a separate legal entity; unincorporated.
Owned and controlled by one person.
May have employees, but only one owner.
Owner accepts all risk and liability.
Simplest business type, easiest to start.
Estimated 70% of businesses in the US are sole proprietorships.
If sold, must be operated by the new owner as either a different sole proprietorship or a different business entity through a sale of assets.

Partnerships

An unincorporated organization with two or more owners.
Classified as a partnership for federal tax purposes if members carry on a business and divide profits; can range from small business to complex organizations.
A partnership doesn't pay income tax; instead, any profits/losses "pass through" to its partners.
Partners are responsible for reporting their share of the partnership's income or loss on their individual returns.
An LP must always have at least one general partner; they have legal responsibility for the partnership's debts and liabilities.
Partnerships file annual information returns (Form 1065, U.S. Return of Partnership Income)
Partners are not employees.
Partnerships can have unlimited number of partners and those can be foreign or domestic.
Do not issue Forms W-2 to partners.
Issue Schedule K-1 to each partner, showing income and losses.

Joint Undertakings

Merely sharing expenses does not automatically form a partnership.
Co-ownership of rental property is generally not considered a partnership unless substantial services are provided to the tenants.
"Substantial services" are primarily for tenant's convenience (e.g., cleaning, changing linen, maid service).
Rental activity would be reported on Schedule C (if single owner) or as a partnership (if multiple owners) and not Schedule E.

Limited Partnerships (LP)

A partnership with at least one limited partner in addition to general partners.
Limited partners have no obligation to contribute additional capital.
Limited partners have limited liability risk based on their investment in the partnership.
Limited partners may not sign the partnership return or represent the business before the IRS.
Limited partners have restricted activity levels in management in most states.
A state-level entity; requires a Certificate of Limited Partnership or a certificate of Formation to be filed with the state's Secretary of State.

Limited Liability Partnerships (LLP)

An entity formed under state law.
Typically used for professional services (e.g., law firms, CPA firms).
In some states, LLCs are not allowed for certain professional services so LLP's are used.
Partners in an LLP are protected from liability for the malpractice of other partners or their employees.
Limited liability protection to each partner.

Qualified Joint Ventures

Commonly used for small businesses operated by spouses without a formal partnership agreement.
If the spouses are the only members, actively participating as the jointly owned and operated business, it can be classified as a qualified joint venture (QJV).
Spouses file separate Schedule C's and separate Schedule SE's.
Exception for married couples living in community property states who might be able to file as QJV's.

Corporations

C Corporations:
- Separate legal entity.
- Shareholders aren't personally liable for corporate debts.
- Run by a board of directors; responsible for corporate oversight.
- Profits are taxed at a flat rate (21%).
File annual income tax returns on Form 1120 (U.S. Corporation Income Tax Return).
S Corporations:
- Separate legal entity.
- Profits/losses pass directly to shareholders.
- Income, losses, deductions, and credits are passed through to the shareholders on their individual income tax statements.

Limited Liability Companies (LLC)

Another type of business entity formed under state law.
Treated as a "disregarded entity," a corporation, or a partnership, depending on ownership structure.
Most LLCs in the US are taxed as partnerships, filing Form 1065.
Professional Service Limited Liability Company (PLLC) is a type of LLC for professionals (e.g., doctors, lawyers, engineers, CPAs).

Farmers and Fishermen

Primarily engaged in crop production, animal production, or forestry and logging.
Classifications for these businesses are based on the nature of the activity, not the type of entity.
Congress enacted specific tax laws for farming.

Tax-Exempt Organizations

Nonprofits.
Can be corporations, trusts, or unincorporated associations.
Earnings cannot benefit private shareholders.
Must have a tax-exempt purpose
Operate under IRS Section 501(c).

EIN (Employer Identification Number)

Used to report business transactions.
Not assigned to individuals, it identifies businesses instead of people.
Required if a business operates as a corporation, exempt organization, trust, estate, or partnership.
Must apply for an EIN if they pay employees.

Reporting Requirements

Form W-2: Wage and Tax Statement for employees.
Form W-9: Provides taxpayer identification information to individuals or entities that need to file an information return.
Form 1099-NEC: Reports nonemployee compensation to independent contractors.
Form 1099-MISC: For various business income (e.g., rents, prizes, awards).
Form 8300: Reports cash transactions over $10,000; filed within 15 days to the IRS.

Worker Classification

Businesses must determine if someone they pay is an independent contractor or employee.
Incorrect classification can lead to tax issues.

Statutory Employees

Certain workers are considered statutory employees.
Their income and expenses are reported on Schedule C.
Employers are responsible for reporting and withhold certain amounts for their employers.

Statutory Nonemployees

Two main types:
- Licensed real estate agents.
- Direct sellers.
- Compensation reported on Form 1099-NEC and Schedule C by the individual.

FICA and SE Tax

Employers must pay Social Security and Medicare taxes.
Only the first $137,700 of employee compensation is subject to Social Security tax.
There's no cap on Medicare tax. (2020 Rates given)

CARES Act Deferral

Offer to defer the 6.2% employer portion of Social Security tax for businesses in 2020, for those eligible.

FUTA Tax

Federal Unemployment Tax; paid by employers only, to fund unemployment compensation to workers who have lost jobs.
Rate depends on the first $7,000 of employee wages.

Trust Fund Recovery Penalty (TFRP)

100% penalty for failing to timely deposit or pay tax.
Can significantly affect businesses if not handled correctly
Assessed against anyone responsible for collecting or paying withheld employment taxes.

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Description

This quiz covers essential topics related to business entities, focusing on sole proprietorships and partnerships. Learn about the unique characteristics and tax implications of these business structures as part of your tax education. Perfect for understanding the foundations of business law.