Taxation of Businesses: Corporations and Partnerships

Businesses are taxed differently depending on their entity type. CPAs must understand the rules for C corporations, S corporations, and partnerships.

Corporate Taxation

C corporations are taxed as separate entities. Profits are taxed at the corporate level, and dividends are taxed again at the shareholder level (double taxation).

S corporations, on the other hand, pass income directly to shareholders, avoiding double taxation.

Partnership Taxation

Partnerships do not pay income tax. Instead, profits and losses are passed through to partners’ personal returns.

Calculating Taxable Income

• C Corporations: Start with gross receipts, subtract COGS, expenses, and deductions.
• Partnerships: Allocate items of income and deduction among partners based on the partnership agreement.

Real-World Application

CPAs advise clients on entity selection and help prepare complex tax returns for multi-owner businesses.

Formula

\[ \text{Taxable Income} = \text{Gross Income} - \text{Deductions} \]