22

Question 1

S-Copr Eligibility

Answer 1

-SHAREHOLDER requirements
100 shareholder limit , us. citizen, residents, certain trusts, certain tax exempt organizations

-CORPORATION requirements 
Domestic corporation, cannot be an "ineligible" corporation, must be one class of stock 

-FAMILY members & shareholder limits
Family and estates count as one shareholder, family members include a common ancestor, lineal descendants & their spouse or former spouse

Question 2

S-corporation Election

Answer 2

• must make a affirmative election to be treated as an s-corp
• file form 2553 ; deadline 3/15 of the effective tax yr
• All shareholders must consent

Question 3

S-corporation termination

Answer 3

1) VOLUNTARY termination
- elected by shareholders >50% stock
- effective date

2) INVOLUNTARY termination
- failing s corp requirements
- Passive investment income in excess of 25% of gross receipts for 3 yrs ; restricted for Scoprs with E&P
- effective date

Question 4

Shareholders Initial Basis

Answer 4

`Exchange: Tax basis of property transferred - debt relief - FMV of property other than stock + gain

Purchase: purchase price of stock

Question 5

Shareholder’s Annual Basis Adjustments

Answer 5

Increase for:

• Contributions
• Shareholder share of income/g items (include tax exempt income)

Decrease for:

• Distributions
• shareholder share of expenses/losses
• shareholder share of nondeductible expenses

Question 6

Debt basis

Answer 6

Shareholders create debt basis by lending $ directly to the Scorp
shareholder may deduct S corp losses to the extent of debt and stock basis
Distributions are nontaxable to the extent of stock basis

Question 7

Loss Limitations

Answer 7

1) Tax basis limitation: may not deduct loss in excess of their stock basis ; if S/H sells the stock before creating additional basis, the suspended loss disappears unused ; can mitigate disadvantage of not including debt in stock basis by loaning money to S corp
2) At risk limitation: Sum of stock basis + Debt basis
3) Passive activity loss limitation: limit ability to deduct losses unless they are involved in actively managing the business

Question 8

Self employment income

Answer 8

• scorp OBI is not classified as SE
• salary is subject to social security taxes
• tax planning incentives

Question 9

Operating issues

Answer 9

1) Accounting method and period
- use calendar year end unless theres a purpose for an alternative year end or a natural year end

2) Income and Loss allocations
- flow-through entities ; profit and losses flow through to S/H for tax purposes

3) Allocate profit/losses pro-rata based on the # of outstanding shares each S/H owns on each day of the tax year
4) separately stated items: taxed differently ; Scorp may hold stock in Ccorp, dividends will flow through

Question 10

Operating distribution for S- Corp with no C-corp E&P

Answer 10

• entity may have been S corp since inception or they just converted to an scorp but have no accumulated E&P
• S/H distributions are tax free to the extent of the S/H tax basis
• if distribution exceeds the shareholders stock basis, S/H has a capital gain = to the excess distribution amount

Question 11

Operating Distribution for S corp with E&P

Answer 11

• distributions come from AAA, E&P, SH basis
• Distribution from AAA are non taxible to the extent of basis; excess is capital gain
• distribution from SH basis are non taxable to the extent of basis, excess is capital gain

Question 12

AAA

Answer 12

• Accumulated adjusted account
• represents cumulative income/loss since the co became an S-corp
• AAA may be negative but distributions cannot make AAA negative or more negative