Many small business owners are actively involved in the community and thus donate time and money to their favorite cause. In almost every case the owner believes the donation is a business deduction. It is NOT a business deduction for tax purposes except under the C-Corporation status; however, the business is still writing the check. Therefore the bookkeeper must still track the deduction and identify the donation properly so the gift is deductible on the owner’s personal tax return.
Pass-through taxation is an IRS concept related to partnerships, S-Corporations, trusts and a few other special types of business operations. Pass-through taxation is reported via Form K-1 and this document allocates the earnings, special forms of income and deductions to the respective owners based on some preset formula as defined in the legal documents of the entity. Pass-through taxation is customarily less expensive to the taxpayer than traditional business taxation.
One of the tax attributes of an S-Corporation over other forms of tax entities is the ability to reduce the overall tax obligation. Naturally the lower the overall tax requirement the more profit generated for the owner(s). The S-Corporation allows an owner to reduce their tax responsibility via the compensation package assigned to the owner.
Real Estate Investment Trusts are corporations, trusts or associations that act as agencies in real estate and associated mortgages. This is a specialized tax segment and it requires recognition by the Internal Revenue Service to operate as a Real Estate Investment Trust (REIT). In general, the REIT pays little to no income taxes and acts very similar to a pass-through entity for tax purposes. All REITs must comply with Code Section 856 which addresses compliance for this privileged tax advantage. Typically, REITs file Form 1120-REIT for tax purposes.
A secondary advantage for REIT status is the ability to raise capital via syndication. Section 856(a) and (b) require a minimum of 100 shareholders or owners of interest in the business entity. This allows for a more advantageous management situation by having a more formal elected board of trustees or directors. In addition, it allows for greater ease of transfer of ownership with the respective investors.
To fully appreciate the Real Estate Investment Trust, you should become acquainted with the history behind REITs. From there, there are unique advantages associated with REITs and an investment in one. As with all business situations, there are some disadvantages and you should be aware of them. The following sections cover these three topics and I’ll finish off with my own conclusion.
Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner. Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.
As a small business grows, there comes a time when the owner(s) should consider incorporating the business. A corporation is a separate entity recognized by the state of domicile for the business. It is as if a new life is created. The state acknowledges the existence of this entity and therefore grants limited legal rights similar to those rights possessed by the citizens of that state.
A K-1 is a reporting tool to the Internal Revenue Service. It is used by Partnerships, S-Corporations and Trusts to report the taxpayer’s share of income, deductions, and credits. A K-1 is similar to Form W-2 or 1099 in that the information provided informs the taxpayer of what has been reported to the Internal Revenue Service.
A partnership is a form of a business entity that provides many more advantages than any other form of business entity. There are several basic principles of a partnership that once understood, the reader can use to his advantage in the small business world. Below are descriptions and an explanations of the basic principles of a partnership and the corresponding legal impact.