Area 5: Federal Taxation of Entities (23-33%)
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Annual Limit = FMV of Loss Corp Stock (pre-change) × Long-Term Tax-Exempt Rate
Triggered by >50 percentage point ownership change in 3-year period. Limits post-change use of pre-change NOLs.
| Feature | C Corp | S Corp | Partnership | Sole Prop |
|---|---|---|---|---|
| Tax form | 1120 | 1120-S | 1065 | Schedule C |
| Entity-level tax | Yes (21%) | No | No | No |
| Pass-through | No | Yes (K-1) | Yes (K-1) | Yes (Sch C) |
| SE tax on owners | No | No (wages instead) | Yes (general partners) | Yes |
| Loss limitations | NOL rules | Stock + debt basis | Outside basis + at-risk + PAL | At-risk + PAL |
| Max shareholders/partners | Unlimited | 100 | Unlimited | 1 |
| Basis includes entity debt | N/A | No (direct loans only) | Yes (all liabilities) | N/A |
| Feature | Accumulated Earnings Tax | Personal Holding Company Tax |
|---|---|---|
| Rate | 20% | 20% |
| Trigger | Accumulating E&P beyond reasonable business needs | Stock + income tests met |
| Stock test | None specific | >50% owned by 5 or fewer individuals |
| Income test | None specific | ≥60% of AOGI is PHC income |
| Avoidance | Demonstrate reasonable business needs or pay dividends | Pay dividends to reduce undistributed PHC income |
| Self-assessed | No — IRS asserts | Yes — self-reported on Schedule PH |