Taxing Definitions

Definitions — Taxing business

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In September, just in time to celebrate the upcoming fiscal new year, the Joint Committee on Taxation released a report on the present US federal income tax law and data related to the taxation of business income. In addition to definitions and data on business entities in the US, the report contained a table detailing the principal differences in the taxation of C corporations, partnerships, S corporations, and sole proprietorships that could serve as required reading for a continuing professional education course.

Here are questions based on information in the report. The PDF of the report is included at the bottom of the post, or you can download a copy from the Joint Committee on Taxation website (Report JCX-42-17).

Question 1.

Under current law, C corporations, partnerships, S corporations, and sole proprietorships can carry back net operating losses two years and forward 20 years. What is one major difference between the treatment of net operating losses of C corporations and other business entities?

 

 

Question 2.

Throughout the period 1978 to 2014, which type of business entity made up the vast majority of businesses?

 

 

Question 3.

Which entity type accounts for the largest amount of section 179 deductions in terms of dollars?

 

 

Question 4.

The Joint Committee on Taxation Report JCX-42-17 compared the top combined statutory corporate income tax rates in countries in the Organization for Economic Cooperation and Development, including rates set by central governments as well as sub-central governments and some (but not always all) surtaxes and deductions.

True or false–according to the report, from 2013 to 2017, the US had the highest tax rate among the countries in the Organization for Economic Cooperation and Development.

 

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JCT Report on Current Tax Law for Business 2017

 

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Note: This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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For C corporations, NOLs generally can be carried back and forward at the entity level. For other entities, NOLs are carried back and forward at the owner level. (See page 13 of the Joint Committee on Taxation Report JCX-42-17 released September 15, 2017.)

Right answer!

Throughout the period 1978 to 2014, nonfarm sole proprietorships made up the vast majority of businesses. (See page 36 of the Joint Committee on Taxation Report JCX-42-17 released September 15, 2017.)

The S corporation is the second most prevalent business form. In 2014, S corporations constituted 12.2% of all business entities. By contrast, as recently as 1988, S corporations accounted for less than 6% of all business entities. The growth in the number of S corporations was most dramatic immediately following 1986, while the number of C corporations declined each year from 1987 through 1993.

After an increase in the number of C corporation returns in the mid-1990s, the number of C corporation returns has again declined each year since 1998.

The number of partnership returns filed reached a peak in 1985 and then generally declined until 1993. Since 1993, partnership returns filed and S corporation returns filed have grown at approximately the same rate.

LLCs generally are taxed, at the election of the owners, either as partnerships or as corporations. In the great majority of cases involving U.S. businesses, LLCs are taxed as partnerships. The number of farm returns (that is, individuals operating farms as sole proprietorships and reporting their income on Schedule F of Form 1040) generally declined throughout the period.

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Right answer!

S corporations account for the largest amount of section 179 deductions at $64.19 billion, followed by sole proprietorships and farms with $30.99 billion, C corporations with $12.89 billion, and partnerships with $6.51 billion.

In percentage terms, S corporations account for 56% of section 179 deductions, followed by sole proprietorships and farms with 27.1%, C corporations with 11.2%, and partnerships with approximately 5.6%.

(See page 36 of the Joint Committee on Taxation Report JCX-42-17 released September 15, 2017.)

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Right answer!

From 2007 to 2012, the US had the second highest combined statutory corporate income tax rate among Organization for Economic Cooperation and Development countries, and had the highest rate from 2013 to 2017.

(See page 36 of the Joint Committee on Taxation Report JCX-42-17 released September 15, 2017.)

Editorial Note: Not all corporations pay the full statutory rate. The report did note the average effective tax rate of US corporations is the fourth highest among G20 countries. “G20” or Group of Twenty, is an international forum for the governments and central bank governors from Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russian Federation, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union.

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