Question

Explain why the tax law prefers flowthrough entities like partnerships and S corporations to have a year-end that matches the year-end of its owners.

Answer 1

FLOW-THRUGH ENTITY

A flowthrough entity is legal business entity that passes income on the owners and/or investers of the business.flowthrough entities are a common device used to limit taxation by owners are taxed double taxtion,not the entity itself.

KEY TAKEAWAYS

A flowthrough(pass-through) entity is a legal business entity that passes income on to the owners and/or investers of the business.

Flow-through entities are a common device used to limit taxation by avoiding double taxation.

With flow-through entities, the income is taxed only at the owner' s individual tax rate for ordinary income.

TYPES OF FLOW-THROUGH ENTITIES

Flow-through entities are commonly grouped into sole proprietorship, partnerships (limited,generak and limited liability partnerships)and S Corporations,along withincome turst and limited liability companies.A sole proprietor reports all his or her business income in her personal income tax return. the internal revenue service (IRS) considers this from of taxtions as a flow-through given that the business separately.

S corporations have profits flows through to shareholders who report the income on schedule E of their personal income tax. Although s corporations owners do not pay the self-employed contributions act tax on their profits, they are required to pay themselves ''reasonable compensation,'' which is subject to the regular social security tax. in canada, a flow-through entity includes an investments corporations,a mortgage investments coropration,a mutual fund corporation, a partnership,or a trust

PARTNERSHIP

Seperte entity, but does not pay tax(multi sole-propriety) flies information return (From1605) will see shortly

Business income and expense items are aggregated in computer the ordinary business income(loss) of the partnership

Certain income and expense items are reported separately to the partners investment expenses(to be dicussed in detail later)

partnerships ordinary business income loss and seperately reported items are allocated to partners ording their profit and loss sharing ratios

S Corporation

separete entity,only pays special taxes files informations retrun from 11205

similar to partnership taxations

the s corporation ordinary business income and the separately reported items are allocated to the shareholders according to their stock ownership interests