What you can learn about tax entities in an accounting master’s program

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Understanding how taxes affect a person’s or a company’s financial well-being is an important aspect of working in accounting. One course students earning their master’s degree in accounting online through the Collat School of Business will take is AC 620: Tax Entities.

This class discusses certain parts of the Internal Revenue Code and Regulations and covers some helpful tax planning strategies. Here are some of the details you may learn in this course:

What is a tax entity?

A taxable entity is any person or organization that must file annual tax returns if they made income. There are several types of taxable entities:

Individuals

Every U.S. citizen who earns an income must pay taxes. This applies to dividends and interest earned from accounts and investments in addition to generated income.

Children and dependents who earn income must also file their taxes if they make more than a certain amount. The minimum taxable limit depends on the circumstances, but for most unmarried dependents under age 65 in 2017, the threshold was $6,350, according to the IRS.

Married couples

Married couples filing jointly are considered a single entity. Both people report their incomes, deductions, credits, and exemptions.

Trusts

If a trust earns income, it must be filed separately from the beneficiaries and trustees, according to Zacks. When filing taxes for a trust, the preparer must include any applicable income, deductions, and credits.

Corporations

C Corporations are the only business structure that the IRS taxes separately from the owner. Corporations pay taxes based on net income for that year.

Other types of businesses

Aside from C Corporations, businesses can be classified as:

  • S Corporations
  • Limited liability companies
  • Partnerships
  • Sole proprietorships

Though taxes need to be filed on these organizations, they aren’t taxed as separate entities. Sole proprietorships’ taxes are included with the business owners’ individual income taxes. Income is passed through the organization to the partners, owners, stockholders, or members of the LLC, S Corporation, or partnership.

What is a tax exempt entity?

A tax exempt entity is one that doesn’t have to pay federal income taxes. Organizations must apply for tax-exempt status and meet two requirements to qualify, according to Zacks:

  • The organization must primarily operate for a charitable, religious, or civil rights purpose.
  • The organization must benefit the public good, not the owner.

Tax-exempt entities have to pay payroll and other types of taxes and may need to pay state income taxes.

According to the IRS, there are a number of types of organizations that can be tax-exempt. These include:

Charitable organizations

Tax-exempt under the 501(c)(3) section of the Internal Revenue Code, charitable organizations are also called not-for-profits. To be approved for tax-exempt status, they can’t be operated for private interests or engage in lobbying for political interests. Master of Accounting students at the University of Alabama at Birmingham will also take AC 514: Governmental and Not-for-Profit Accounting, which will discuss accounting principles for 501(c)(3) organizations.

Social welfare organizations

Social welfare organizations, also called civic leagues, are very similar to traditional not-for-profit organizations. They’re classified as 501(c)(4) organizations, according to the IRS.

Agricultural or horticultural organizations

Agricultural or horticultural organizations are designed to support the interests of people who raise livestock, harvest crops or aquatic resources (excluding minerals), or cultivate plants.

Labor organizations

Labor organizations include labor unions, but a group doesn’t have to be a recognized labor union for the IRS to consider it a labor organization.

Trade associations

Trade associations, also known as business leagues, are exempt under the 501(c)(6) section of the Internal Revenue Code. They include real estate boards, chambers of commerce, boards of trade, and professional football leagues. To gain tax-exempt status, the organization must be dedicated to improving the conditions of its lines of business.

Social clubs

Social clubs must be organized for the pleasure or recreation of its members. They must also provide personal contact among members, limited membership, and be supported by membership dues, fees, and assessments.

Fraternal societies

There are two types of fraternal societies, according to the IRS:

  • 501(c)(8) organizations (fraternal beneficiary societies)
  • 501(c)(10) organizations (domestic fraternal societies)

In both cases, the organization must have a named fraternal purpose which applies to all members, and operate according to the lodge system in which there’s a parent organization and branches or lodges thereof.

For 501(c)(8) organizations, all or the majority of members must have access to life, sick, accident, or other benefits. For 501(c)(10) organizations, all earnings must be devoted to charitable, religious, scientific, literary, educational, or fraternal purposes. These organizations cannot offer benefits.

Employee benefits associations or funds

There are three types of employee benefits associations, according to the Internal Revenue Code:

  • 501(c)(4): Local association of employees: Membership must be limited based on locality.
  • 501(c)(9): Voluntary employees’ beneficiary associations: Membership must be voluntary, and the organization must provide payment for life, sick, accident, or other similar benefits to members or their dependents.
  • 501(c)(17): Supplemental unemployment benefits trust: Must be maintained by an employer or employees, and organized to provide supplemental unemployment compensation when an employee involuntarily leaves his or her job.

Veterans’ organizations

Veterans’ organizations can either be classified under section 501(c)(19) or 501(c)(23) in the Internal Revenue Code.

To be classified as 501(c)(19), the organization must be a group of past or present members of the United States armed forces, an auxiliary unit of a post, or a trust organized for that organization. Further, the organization must operate for the benefit of a community, disabled veterans, to continue events in the memory of deceased veterans, or another exempt purpose.

To be classified as 501(c)(23), the organization must have been founded before 1880 and the primary purpose must be to provide insurance or other benefits to veterans.

Political organizations

Political organizations must be organized to accept contributions or make transactions for an exempt function, which is defined as influencing the selection, nomination, election, or appointment of a person to public office.

Study tax entities when earning a master’s degree in accounting

Understanding tax entities is essential for a professional accountant. Students earning their Master of Accounting degree at the University of Alabama at Birmingham have access to a well-rounded education, which includes an in-depth course on tax entities. To learn more about the Master of Accounting curriculum at the Collat School of Business, reach out to an enrollment advisor today.

Recommended Readings:

Which skills do you need to be a not-for-profit accountant?

What it’s like working for the Big 4

Sources:

IRS

Zacks: Taxable entities

Zack: Tax-exempt entities

IRS: Types of tax-exempt organizations

University of Alabama at Birmingham Collat School of Business MACC Course Descriptions

IRS: Life cycle of a social welfare organization

IRS: Fraternal societies

IRS: Veterans organizations

IRS: Exemption requirements political organizations

IRS: Supplemental unemployment benefits trust 501(c)(17)

IRS: Voluntary employment beneficiary association 501(c)(9)

IRS: Local association of employees 501(c)(4)