GAAP Financial Statements of Pass-Through Entities

September 1, 2014 | Download PDF

Business Entities and their Income Tax Differences C corporations incur income tax expense (federal and state) at the business-entity level; a second level of income taxes are incurred at the C corporation owner level when after-tax net income is distributed in the form of dividends.   

This article was published by Fischer Barr & Wissinger LLC (FBW), now part of Marks Paneth LLP.

Business Entities and Their Income Tax Differences

C Corporations and PTE Financial Statement Inclusions

Other Differences Between PTE and C Corporation

Business Entities and Their Income Tax Differences

C corporations incur income tax expense (federal and state) at the business-entity level; a second level of income taxes are incurred at the C corporation owner level when after-tax net income is distributed in the form of dividends.  Pass-through entities (PTEs), such as S corporations, limited liability companies (LLC), partnerships and sole proprietorships, do not incur any business-entity level income taxes.  Income taxes on PTE income are only incurred one time, at the owner level.  The avoidance of a second level of income taxes provides a strong incentive for business owners to form their companies as a PTE.  As a result of this and other incentives, approximately 78% of all businesses filed income taxes as a PTE during 2012, with approximately 22% of businesses filing as C corporations.

C Corporations and PTE Financial Statement Inclusions

What are the financial statement implications of operating a company as a C corporation versus a PTE?  Here are financial statement line items that you can expect to see in C Corporations but not in PTEs:

Other Differences Between PTE and C Corporation

PTEs typically provide their owners with the funding necessary to pay their individual income taxes on the taxable income passed-through to them from the business.  Such funding may be classified as dividends, compensation and/or loans.  Accordingly, C corporation financial statements may contain current and deferred income tax expenses, and assets and liabilities not found on PTE financial statements; PTE financial statements may contain dividends, higher shareholder compensation and loans not found on C corporation financial statements.  These factors complicate the comparability of a PTE’s financial statements with C corporation financial statements.  Moreover, if owner income taxes are funded by dividends in one year, owner compensation in another year and loans in another year, the subject company’s year-to-year financial position and results of operations may not be entirely comparable.

Understanding the implications of a PTE’s financial statements can be very complicated.  Feel free to contact Eric Barr at ebarr@markspaneth.com if you have any questions regarding how best to take advantage of the tax benefits of a PTE, or to better understand the financial statement implications of a PTE.  Eric is nationally known as a thought leader in the area of PTE valuation and accounting.

Contact Eric Barr:

Phone: (973) 630-5031

ebarr@markspaneth.com 

This article was published by Fischer Barr & Wissinger LLC (FBW), now part of Marks Paneth LLP.

 


SUCCESS IS PERSONAL Click here to learn more about our brand