Tax Considerations

Income Tax
Partners taxed on proportionate shares of partnership income whether or not distributed.  Partnership return is merely an information return. Income is taxed to the corporation: stockholders are taxed only on dividends distributed to them.

Accumulations
Partners taxed on  accumulated as well as distributed earnings.

Stockholders are not taxed  on accumulations.  However, penalty tax applies if purpose is to avoid tax and  accumulation exceeds a certain amount.

Capital Gains and Losses
Partners taxed on their proportionate shares of gain and loss.  They apply the limitations  just as if they had only individual gains and losses.

A corporation uses the alternative computation.

Exempt Interest
Partners not taxed on exempt interest received from the firm.

Exempt interest distributed by a corporation would be fully  taxable income to the stockholders.

Charitable Contributions
The partners add their proportionate shares of the partnership’s contributions to their own personal contributions in computing their incomes.

Corporations take their own deduction  for charitable contributions; but the maximum deduction is a fraction of an individual taxpayer’s maximum deduction.

Pension planning
Partners can be beneficiaries of a Keogh plan.

Officers and employee stockholders can be beneficiaries of a pension plan.

Social Security
Partners don’t pay Social Security tax on compensation from the firm, but must pay self-employment tax.

Compensation to officer and employee stockholders is subject to Social Security  tax.

State Taxes
In  most states, partnerships not subject to state income and purchase taxes.

Corporations  are subject  to these taxes, although deductibility on federal return lessens cost.