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Entries tagged “Pass-through Taxation”

Pass-Through and Charitable Deductions Explained

Insight Brent Nelson Brent Nelson · October 05, 2019
Rimon's Brent Nelson co-writes an article on pass-through and charitable deductions. An overview of how these two deductions function, with an eye toward stacking their benefits. The Pass-Through Income Deduction under Code Section 199A (199A Deduction) allows taxpayers to deduct up to 20% of their pass-through business income. However,

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What is an S-Corporartion?

Insight Michael Moradzadeh Michael Moradzadeh · August 19, 2009

S-Corporations are corporations that elect to be treated as pass-through entities by the IRS. In order to qualify for S-Corporation status a corporation needs to satisfy several conditions, including the following: 1) all shareholders must be residents of the United States; 2) the corporation may only have one class of shareholders and may not have more than 75 shareholders; and 3) the company’s shareholders must be any of the following: individuals, estates, certain trusts, certain partnerships, tax-exempt charitable organizations, and other S corporations (but only if the other S corporation is the sole shareholder). This means S-Corporations may not be owned by other C-Corporations, LLCs, or foreign residents. If any of the requirements are not met at any time, the corporation automatically loses its S-Corporation status and will be treated as a a C-Corporation.

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Where should I form my entity?

Insight Michael Moradzadeh Michael Moradzadeh · August 19, 2009

This can be a very complex question. If you are looking to grow the company and get outside investment, then you should probably form an entity in Delaware. If your entity will have real estate holdings Nevada might also be a good option. Otherwise, it might make the most sense to simply form the entity in the state where you will be conducting most of your business.

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What is pass-through/flow-through taxation?

Insight Michael Moradzadeh Michael Moradzadeh · July 18, 2009

In a pass-through (or flow-through) entity, the entity’s income and expenses “pass through” the entity and are treated as the income and expenses of its owners. LLCs and S-Corporations are pass-through entities. This differs from a C-Corpoartion (which is the default form of corporation) which is taxed a corporate income tax at the end of the fiscal year in addition to the personal income taxes and dividend taxes that its owners and employees pay. Federal corporate income tax is about 15% to 35% of profits, and most states also have corporate income tax. This means after a C-Corporation has paid its expenses for the year, it will be taxed at least 15%-35% of whatever is left above the amount the company started with that year. If the company is an LLC or an S-Corporation, there is no corporate tax, and indeed the owners can even apply losses of the company against their personal income.

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Should my business be a Corporation or an LLC?

Insight Michael Moradzadeh Michael Moradzadeh · July 17, 2009

If your business only has a few investors and you do not anticipate receiving outside financing in the near future, an LLC is probably best for you because of its flexibility, simplicity, and pass-through taxation (see blog entry on pass-through taxation). However, if you want a board of directors that is distinct from the officers and/or shareholders of the company, or if you are looking for institutional investors, then a corporation is probably a better form of entity because of its more organized and established structure of governance.

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