Please respond to the following: 1. The IRC restricts the choices for a partners

Question

Please respond to the following:

1. The IRC restricts the choices for a partnership‘s tax year to prevent the deferral of tax. This causes most partnerships to adopt a calendar year for tax reporting. From the e-Activity, create a scenario using a fiscal tax year which allows a partnership to defer taxes that meet the requirements of Sections 706 and 444 of the IRC.

2. As discussed in the text, large accounting firms and other professional firms operate as limited liability partnerships (LLPs). Contrast the LLP form of business under state laws to the LLP for tax purposes. Next, suggest the major reasons why a new entity would choose an LLP over a traditional partnership for tax purposes.

***Please include references when answering these questions.

Explanation / Answer

IRS requires taxpayers to figure income on the basis of a tax year. A tax year covers a period of 12 consecutive months. The two kind of year include: Calendar year and Fiscal year. Through choosing a fiscal year ending June 30, revenues expenses will be more precisely matched within 12 months period. As a result, the income statement will be prepared as of June 30 and will reflect a more accurate presentation of net income. If a partnership adopts a fiscal tax year other than required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year

By default, an LLP is treated like a partnership for federal tax purposes and is not a separate taxpaying entity. Income is reported on the owners’ personal tax returns, which may result in lower taxes, and does not require the filing of a separate tax return when there is only one owner. A multi member LLP can elect to be taxed as a corporation that would need a separate tax return. LLPs enjoys pass through treatment for taxes by the IRS. The IRS does not tax the LLP as an entity, but taxes the partners individually hence, partners avoid double taxation. For tax purposes, I would choose an LLP since it is flexible

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