Welcome to the taxation of business entities II. My name is Michael Donohoe and I'm an Associate Professor in the Department of Accountancy. This may not be new to you if you recently completed my prior course, taxation of business entities one which provides an introduction to the US federal income taxation of subchapter C Corporations. In contrast, this course, taxation of business entities II, examines the US federal taxation so-called pass-through or flow through entities which include partnerships, S corporations and limited liability companies. Pass-through entities are rather unique because owners of the enterprise do not treat the enterprise as a separate taxable entity like you learned about in the prior course. Instead, the owners are taxed on their proportionate share of the entity's taxable income. In other words, taxable income earned by the entity flows through to its owners. Understanding the taxation of pass-through entities is incredibly important because the use of these entities has grown rapidly over the past 25 years or so. For instance, recent academic research finds that in 1980, pass-through entities accounted for about 21 percent of US business income. However, by 2011 they accounted for almost 55 percent. Furthermore, the IRS reports that partnerships file 3.6 million tax returns in 2014 not too far off from the 5.9 million filed by C-Corporations. Before we continue, it is helpful to understand how this course is structured. This module and the three that follow examined the taxation of a partnership, which is an association formed by two or more persons to carry on a trade or business with each contributing money, property, labor or skill and with all expecting to share profits and losses. The taxation of partnerships is governed by subchapter K of the Internal Revenue code. Similar to how the prior course examined the lifecycle of a C corporation. This course generally examines the lifecycle of a partnership and covers key topics such as partnership, formation, operation and termination. After learning about partnerships, you will then examine the taxation of other types of pass-through entities such as limited liability companies and Subchapter S corporations. These two increasingly common pass-through organizational forms are taxed similarly to partnerships. From here, you will then shift focus from entities taxation to important issues regarding professional tax practice and ethics. Throughout the course, you will apply the concepts introduced in each lesson to the style as business of Sunchaser Shakery. Recall from the prior course at Sunchaser shakery operates from a modest driftwood shack position on top of a large sand dune overlooking a popular Florida beach. The business is well known by locals and tourists for its fruit smoothies and milkshakes, assortment of sun dried fruit mixers and live, as well as very loud reggae music. In addition, Sunchaser captures a lot of attention with its patent the drink delivery system which sends orders from the top the sand dune down to customers on a coconut zip line. As an avid, sunchasing beach goer and reggae fan, Nicholas, the founder and owner, created Sunchaser by simply combining some of his most favorite things in life. Over time however, Sunchaser has grown quite popular, too popular. The prior course covered the tax effects of operating Sunchaser as a subchapter C Corporation. As you might expect, this course we'll examine the tax effects of operating Sunchaser as a pass-through entity beginning with a partnership. It is also important to consider that light corporations, partnerships routinely acquire, hold, sell and exchange items of property. Consequently, a solid understanding of property transactions and key concepts such as amount realized and basis are essential for you to learn the concepts covered in this course. It might be helpful for you to review the property transaction refresher and the taxation of business entities one before continuing. One last thing, this course accommodates extensive changes made to pass-through entity tax laws on December 22, 2017 by HR1 and formerly known as the Tax cuts and Jobs Act or TCJA, and officially known as an act to provide for reconciliation, pursuant to titles two and five of the concurrent resolution on the budget for fiscal year 2018. Thus, you can save yourself a lot of frustration by ensuring that any supplemental materials you use during this course such as textbooks, tax statutes and regulations and even news articles are up to date.
