©2015, College for Financial Planning, all rights reserved.

Session 5Corporations and LLCs

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 2

Chapter(s)

4 - 5

LOs 2-4 Explain characteristics, advantages, or disadvantages of a business form.

2-5 Identify requirements for a valid S corporation election.

2-6 Evaluate a situation to recommend the most appropriate business form.

5-2

C Corporation

5-3

C Corporation

5-4

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 fieldso Mnemonic: CALL AAA for HELP

• Benefit of graduated corporate tax rates deniedo Flat 35% tax rate

5-5

S Corporation

5-6

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

status5-7

Section 1244 Stock

• First $1 million of stock issued after incorporation

• Issued to an individual or partnership• Held by original owner• Tax treatment

o Up to $50,000/$100,000 annual loss treated as ordinary loss

o Excess loss is capital losso Capital gain treatment if sold for gain

5-8

LLCsLimited Liability Company• Statutory entity• Partnership taxation by default• 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

5-9

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

5-10

Review Question 1

One tax advantage of a C corporation isa. the ability to have income taxed at

lower rates.b. the ability to distribute income to

shareholders tax free.c. the ability to contribute, tax free,

appreciated securities in exchange for stock of an investment company.

5-11

Review Question 2

S corporation shareholders have the ability to deduct losses to the extent ofa. their original contribution of capital to

the business.b. their adjusted basis in the stock,

adjusted for corporate loans personally guaranteed.

c. their adjusted basis in the stock, adjusted for money they have directly loaned to the corporation.

5-12

Review Question 3

Which of the following are characteristics of a C corporation?I. The number of shareholders is limited.II. The bankruptcy of shareholders has no effect

on the business form.III. Shareholder liability is limited.IV. Capital structure is dependent upon the

resources of the shareholders.a. I and II onlyb. I and IV onlyc. II and III onlyd. II and IV onlye. III and IV only

5-13

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?

I. The corporation would be considered a Personal Service Corporation.

II. The corporation would not be considered a Personal Service Corporation.

III. The net income of the corporation will be subject to graduated tax rates.

IV. The net income of the corporation will be taxed at Bill’s individual tax rates.

V. The net income of the corporation will be subject to a flat 35% tax rate.a. I and IV onlyb. I and V onlyc. II and III onlyd. II and IV onlye. II and V only

5-14

Review Question 5

Which of the following statements are true regarding an S corporation?I. Shareholders have limited liability.II. The number of shareholders is limited to 100.III. The death of an owner requires

reorganization of the corporation.IV. The corporation is a conduit for items of

income, deductions, and tax credits.a. III onlyb. I and IV onlyc. II and III onlyd. I, II, and IV onlye. II, III, and IV only

5-15

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?

I. Up to $50,000 of loss is treated as an ordinary loss.II. Up to $100,000 of loss is treated as an ordinary

loss.III. Any loss in excess of the maximum annual ordinary

loss is treated as a capital loss.IV. A gain on a sale is considered ordinary income.

a. I and III onlyb. II and III onlyc. II and IV onlyd. I, III, and IV onlye. II, III, and IV only

5-16

©2015, College for Financial Planning, all rights reserved.

Session 5End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning