Discuss the similarities and differences between the tax consequences of the operating distribution and the tax consequences of the liquidation distribution.

Partnership formation to dissolution. | Business & Finance homework help

Operating distribution allows corporations to pay dividends to shareholders or make interest payments. Distributions of this nature are subject to ordinary income tax and may be subject to tax on profits from company stock sales.

The liquidation distribution occurs when a company dissolves, and all of its assets are sold and distributed to shareholders. Distributions of this nature are subject to different taxes than ordinary income. They may be subject to a combination of capital gains, losses and normal income. It all depends on the amount paid. The tax rate applicable to capital gains or losses depends upon the individual’s personal tax bracket.

The similarities between these two types of distributions have to do with how they are reported: both must be reported on an individual’s annual Form 1040 return by listing each type separately in order for them to be properly accounted for by the IRS. The differences relate mainly to taxation due: while operating distributions result in taxable ordinary income at one’s personal tax rate, liquidation distributions can include a mix of taxable ordinary income and capital gains/losses based upon how much was received from each asset sold during dissolution.

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