REG 3 - Entity Taxation

How is a C corporation taxed?

• Pays tax at the corporate level.

• Shareholders pay tax again on dividends (double taxation).

What is the federal tax rate for a C corporation?

21%

When is a calendar-year C corporation's tax return due?

15th day of the 4th month after year-end (April 15).

How are bad debts deducted by a C corporation?

Only the direct write-off method is allowed for tax.

How are business meals and entertainment treated?

• Meals → 50% deductible

• Entertainment → Not deductible

Are premiums on key employee life insurance deductible?

• Corporation is beneficiary → No

• Employee is beneficiary → Yes

Are political contributions and lobbying expenses deductible?

No

Are federal income taxes deductible?

No

How are charitable contributions treated for C corporations?

Deductible subject to taxable income limitations.
Excess carries forward.

Why does the Dividends Received Deduction exist?

To reduce multiple levels of corporate taxation on dividends.

What are the Dividends Received Deduction percentages?

• <20% ownership → 50%

• 20–79% → 65%

• ≥80% → 100%

How are C corporation capital gains taxed?

At ordinary corporate tax rates.

How are C corporation capital losses treated?

• Offset only capital gains

• Carry back 3 years

• Carry forward 5 years

What is a temporary difference?

Income or expense recognized in different years for book and tax.

Example:
Depreciation.

What is a permanent difference?

Item recognized for book but never tax (or vice versa).

Example:
Municipal bond interest.

What is Schedule M-1?

Reconciles book income to taxable income.

When is Schedule M-3 required?

Generally when total assets are $10 million or more.

How are C corporation (Net Operating Losses) NOLs treated?

Generally carried forward indefinitely.
Post-2017 NOLs may offset up to 80% of taxable income.

What is an S corporation?

A corporation that elects pass-through taxation.

What are the basic S corporation eligibility requirements?

• Domestic corporation

• ≤100 shareholders

• One class of stock

• Eligible shareholders only

How does a corporation elect S status?

File Form 2553 with unanimous shareholder consent.

How is S corporation income taxed?

Passes through to shareholders.

Is S corporation ordinary business income subject to self-employment tax?

No

Why are separately stated items reported separately?

Because they retain their tax character on the shareholder's return.

How is shareholder stock basis adjusted?

Beginning basis

• Contributions

• Income

− Distributions

− Nondeductible expenses

− Losses

= Ending basis

What limits an S corporation shareholder's loss deduction?

Stock basis + debt basis.

Does corporate debt increase an S shareholder's stock basis?

No.

Only loans made by the shareholder create debt basis.

What is the Accumulated Adjustments Account (AAA)?

Tracks accumulated S corporation income, losses, and distributions.

How are partnerships taxed?

Partnership files informational return.
Income flows through to partners.

What tax return does a partnership file?

Form 1065.

What are guaranteed payments?

Payments to partners regardless of partnership income.

• Deductible by partnership

• Ordinary income to partner

• Subject to self-employment tax

How is a partner's basis calculated? (BASE)

Beginning basis

• Income

• Share of liabilities

− Losses

− Distributions

= Ending basis

What limits a partner's deductible losses?

Tax basis.

Excess losses are suspended.

How are LLCs taxed?

• One owner → Sole proprietorship (default)

• Multiple owners → Partnership (default)

Can elect C corporation taxation.

What is a 501(c)(3) organization?

Tax-exempt charitable organization.

Donations are generally deductible.

What is the difference between a public charity and a private foundation?

• Public charity → Public support (churches, hospitals, universities)

• Private foundation → Primarily makes grants

What is nexus?

Minimum connection required before a state may tax a business.

What's the difference between allocation and apportionment?

• Allocation → Assigns nonbusiness income to one state.

• Apportionment → Divides business income among multiple states.

Compare C corporations, S corporations, and partnerships.

	C Corp	S Corp	Partnership
Pays entity tax?	✅ Yes	❌ No	❌ No
Double taxation?	✅ Yes	❌ No	❌ No
Income flows through?	❌ No	✅ Yes	✅ Yes
Self-employment tax on ordinary income?	N/A	❌ No	✅ Usually yes
Return filed	Form 1120	Form 1120-S	Form 1065