Entity Taxation Comparison
Entity taxation is heavily tested on the TCP section of the CPA exam. You must understand how different entities are formed, taxed, and how distributions are treated. This cheat sheet provides a side-by-side comparison of the major entity types.
Tax Treatment at a Glance
| Feature | C Corporation | S Corporation | Partnership |
|---|
| Tax form | Form 1120 | Form 1120-S (K-1s) | Form 1065 (K-1s) |
| Entity-level tax | Yes (21% flat) | Generally no | Generally no |
| Double taxation | Yes | No | No |
| Loss flow-through | No (NOL stays at entity) | Yes (limited by basis, at-risk, PAL) | Yes (limited by basis, at-risk, PAL) |
| Owner limit | Unlimited | 100 shareholders | Unlimited |
| Entity debt in basis | N/A | Only direct shareholder loans | Yes (all partnership debt) |
| Section 199A eligible | No | Yes | Yes |
| SE tax on distributions | No | No (reasonable salary required) | Yes (general partners) |
Formation Rules
| Entity | Nonrecognition Rule | Key Requirement |
|---|
| C/S Corporation | IRC Section 351 | Transferors must control (80%+ of each class) the corporation immediately after the exchange |
| Partnership | IRC Section 721 | No control requirement; contribution of property is generally tax-free |
Exception: Services contributed receive compensation treatment (taxable) in both entity types.
Distribution Rules
| Scenario | C Corporation | S Corporation | Partnership |
|---|
| Cash distribution | Dividend to extent of E&P; return of basis; then capital gain | No AE&P: tax-free to extent of basis, then capital gain. Has AE&P: AAA first, then E&P (dividend), then basis, then capital gain | Tax-free to extent of basis; excess is capital gain |
| Property distribution | Corporation recognizes gain (as if sold at FMV); shareholder receives at FMV | Corporation recognizes gain; shareholder reduces basis by FMV | Generally no gain recognized by partnership; partner takes carryover basis (limited to outside basis) |
| Liquidating distribution | Corporation recognizes gain/loss; shareholder treats as sale of stock | Same as C corp treatment | Generally no gain unless cash exceeds basis; loss only if distribution is solely cash, receivables, and inventory |
S Corporation Eligibility (Section 1361)
- Domestic corporation
- Maximum 100 shareholders (family = 1)
- Only individuals, estates, certain trusts, exempt organizations
- One class of stock (voting differences OK)
- Not an ineligible corporation
- All shareholders must consent
Basis Comparison
| Basis Event | S Corporation | Partnership |
|---|
| Initial basis | Cash + FMV of property contributed | Cash + adjusted basis of property contributed |
| Income items | Increase basis | Increase basis |
| Tax-exempt income | Increase basis | Increase basis |
| Distributions | Decrease basis | Decrease basis |
| Losses | Decrease basis (limited) | Decrease basis (limited) |
| Entity liabilities | NOT included (except direct loans) | Included (share of all debt) |
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