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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning. Session 5 Corporations and LLCs. Session Details. C Corporation. C Corporation. Personal Service Corporation. C corporation ONLY

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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

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  1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 5Corporations and LLCs

  2. Session Details

  3. C Corporation

  4. C Corporation

  5. Personal Service Corporation • C corporation ONLY • Substantially all of the stock held by employees, retired employees, or their estates • Substantially all of the services performed in listed fields • Mnemonic: CALL AAA for HELP • Benefit of graduated corporate tax rates denied • Flat 35% tax rate

  6. S Corporation

  7. S Corporation Election • Must be a domestic corporation • No more than 100 shareholders allowed • Only one class of stock • Shareholders must be U.S. citizens or residents • All shareholders must be individuals or a certain type of trust • All shareholders must elect S status (Form 2553) • Majority of outstanding stock to revoke S status

  8. Section 1244 Stock • First $1 million of stock issued after incorporation • Issued to an individual, or partnership • Held by original owner • Tax treatment • Up to $50,000/$100,000 annual loss treated as ordinary loss • Excess loss is capital loss • Capital gain treatment is sold for gain

  9. LLCs Limited Liability Company • Statutory entity • Partnership taxation • Limited liability for members • Dissolution upon death, retirement, or resignation • Management structure determined by LLC’s operating agreement • Single member LLC is treated as a disregarded entity

  10. Check-the-Box Regulations • One owner—default taxation as sole proprietorship • 2 or more owners—default taxation as partnership • May elect to be treated as a corporation under the Regulations

  11. Review Question 1 One tax advantage of a C corporation is • the ability to have income taxed at lower rates. • the ability to distribute income to shareholders tax free. • the ability to contribute, tax free, appreciated securities in exchange for stock of an investment company.

  12. Review Question 2 S corporation shareholders have the ability to deduct losses to the extent of • their original contribution of capital to the business. • their adjusted basis in the stock, adjusted for corporate loans personally guaranteed. • their adjusted basis in the stock, adjusted for money they have directly loaned to the corporation.

  13. Review Question 3 Which of the following are characteristics of a C corporation? • The number of shareholders is limited. • The bankruptcy of shareholders has no effect on the business form. • Shareholder liability is limited. • Capital structure is dependent upon the resources of the shareholders. • I and II only • I and IV only • II and III only • II and IV only • III and IV only

  14. Review Question 4 Bill Giles, an engineer, is contemplating forming a C corporation for his practice. He will be the sole employee of the corporation. Which of the following statements accurately describe the income tax consequences of such an arrangement? • The corporation would be considered a Personal Service Corporation. • The corporation would not be considered a Personal Service Corporation. • The net income of the corporation will be subject to graduated tax rates. • The net income of the corporation will be taxed at Bill’s individual tax rates. • The net income of the corporation will be subject to a flat 35% tax rate. • I and IV only • I and V only • II and III only • II and IV only • II and V only

  15. Review Question 5 Which of the following statements are true regarding an S corporation? • Shareholders have limited liability. • The number of shareholders is limited to 100. • The death of an owner requires reorganization of the corporation. • The corporation is a conduit for items of income, deductions, and tax credits. • III only • I and IV only • II and III only • I, II, and IV only • II, III, and IV only

  16. Review Question 6 John Matthews, a married taxpayer filing a joint return, sold Section 1244 stock during the current year. Which of the following correctly identify the tax treatment of the sale? • Up to $50,000 of loss is treated as an ordinary loss. • Up to $100,000 of loss is treated as an ordinary loss. • Any loss in excess of the maximum annual ordinary loss is treated as a capital loss. • A gain on a sale is considered ordinary income. • I and III only • II and III only • II and IV only • I, III, and IV only • II, III, and IV only

  17. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 5End of Slides

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