This table summarizes the treatment of various items from the operation of an entity. The difference in income reporting and the incidence of taxation give rise to basis adjustment that varies among the entities. The treatments of these items provide opportunities for owners of business to reduce their taxes.

Tax Consideration

Sole Proprietorship

Partnership

Corporation

S Corporation

Who is tax on the income

 

Partners are taxed on their share of the

income

Corporation. Shareholders are taxed on

dividends

Shareholders are taxed on their of the income

Is a separate statement of income and deduction items required?

No, but certain items are part of the owner's income and deductions and are not included in operating income.

Yes

No

No

How are capital gains and losses handled?

Not Included in Operating Income. Combined

with owner's other capital gains and losses

Separately stated item. Partners combine them with their other capital gains and losses

Capital gains are ordinary income. Capital losses are deductible only against capital gains. Three-year carry-back and five –year carry- forward of losses

Separately stated item. Shareholders combine

them with their other capital gains and losses

Is corporate depreciation

recapture required

No

No

Yes additional recapture on Section 1250

property

Yes additional recapture on Section 1250

property

Is the dividends received

deduction allowed

NO

No

Yes 70% to 100% domestic corporations

 

Are net operating losses deductible?

Can deduct only against other business income of the owner. Two-year carry back and 20-yearcarry-forward of losses.

Separately stated item Deductions limited to partner's basis and at-risk amount. Loss may be subject to passive loss rules if partner does not materially participate.

Two-year carry-back and 20-year carry-forward of loss.

Separately stated item. Deduction limited to shareholder’s basis plus loans to the corporations and at-risk amount. Loss may be subject to passive loss rules if shareholder does not materially participate.

Is basis adjusted?

Not applicable

Partner's basis is adjusted for operating items, withdrawals and liabilities of the partnership.

Shareholders basis is generally not adjusted unless stock dividend or nontaxable cash dividend received

Shareholder's basis is adjusted for operating items, dividends received. No adjustment for liabilities of the corporation

Are passive losses

deductible

Not deductible in calculating operating income.

Deductible per rules for individuals.

Separately stated item. Partners deduct per rules for individual

Passive loss rules generally not applicable to corporations

Separately stated item. Shareholders deduct per rules for individuals.

Are charitable contributions

deductible

Not deductible in calculating income. Must be deducted on owner's return as itemized deductions.

Separately stated item. Partners deduct as itemized deduction.

Deductible, subject to 10% of taxable income limitation. Special rules from certain donated  inventory

Separately stated item. Shareholders deduct as itemized deduction.