Question

The income tax consequences of a business transaction depend on the type of entity (e.g. corporation vs. partnership) that engages in the transaction because:

		The amount of taxable income from the transaction depends on which type of entity engaged in the transaction
		The transaction may be taxable or nontaxable depending on which type of entity engaged in the transaction
		The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction
		The character of the income (ordinary or capital gain/loss) from the transaction depends on which type of entity engaged in the transaction

Answer 1

The income tax consequences of a business transaction depend on the type of entity (e.g. corporation vs. partnership) that engages in the transaction because:

• The rate at which the income from the transaction is taxed depends on which type of entity engaged in the transaction

Partnership firm is not taxed separately and income from the firm is taxed in the partners hands at individual tax rates unlike corporations which are directly taxed at corporate rates. The rate applicable for all companies would be the same, however in case of partnerships the rate would change based on the individual income and profits from the partnership. All of the income from the partnership would be distributed to the partners and then taxed in their individual tax returns. There is no double taxation in partnership firms. However in corporations double taxation exists like in case of dividends