Ch. 10: Sole Proprietorship, Partnership, LLC, and S-Corp

Sole Proprietorship

An unincorporated business owned by one individual.

Qualified Business Income (QBI)

Active trade or business income from non-service businesses eligible for the Section 199A deduction.

• 20% of qualified business income

QBI Deduction

A deduction permitted to non-corporate taxpayers, generally equaling 20 percent of qualified business income.

• Wage Limitation: Cannot exceed the greater of 50% of wages paid or sum of 25% of wages paid + 2.5% of unadjusted basis of qualified property

• Taxable Income Limitation: Deduction cannot exceed 20% of taxable income computed without regard to the QBI Deduction and any net capital gain

Employer Identification Number

A number assigned to an employer by the IRS to identify the employer for employment tax purposes.

Employer Payroll Tax

The FICA tax (Social Security and Medicare tax) levied on employers that pay compensation during the year

• FICA= 6.2%

• Medicare= 1.45%

  • .9% additional surcharge with income over $250,000 (Married) and $200,000 (Individual)

Self Employment (SE) Tax

Employment tax levied on an individual’s net earnings from self-employment

• FICA= 12.4%

• Medicare= 2.9%

Partnership

An unincorporated association of two or more persons to conduct business as co-owners.

General Partnership

A partnership in which all the partners have unlimited personal liability for the debts incurred by the partnership.

Limited Partnership

A partnership in which one or more partners are liable for partnership debt only to the extent of their capital contributions to the partnership

• Must have at least one general partner.

Limited Liability Partnership (LLP)

A partnership in which the general partners are not personally liable for malpractice-related claims arising from the professional misconduct of another general partner.

Limited Liability Company (LLC)

A form of unincorporated business organization in which the members have limited liability for business debt

• Generally treated as partnerships for federal tax purposes.

Passthrough Entity

A business entity that is not a taxable entity

• The income, gains, deductions, and losses recognized are reported by the entity’s owners and taxed only once at the owner level.

Separately Stated Item

An item of income, gain, deduction, or loss recognized by a passthrough entity that retains its character as it flows through to the owners.

• NOT included in the computation of the entity’s ordinary business income or loss.

Distributive Share

A partner’s share of any item of income, gain, deduction, loss, or credit recognized by the partnership

• Expressed as a percentage and specified in the partnership agreement.

Guaranteed Payment

A distribution from a partnership to a partner to compensate the partner for ongoing services performed for the partnership.

Subchapter S Corporation

A corporation with a subchapter S election in effect

• Corporation is a passthrough entity for federal tax purposes and does not pay federal income tax.

Pro Rata Share

A shareholder’s share of any item of income, gain, deduction, loss, or credit recognized by an S corporation.

• Based on the number of shares of outstanding stock owned by the shareholders.