5.1 - S Corporations

Question 1

A contribution to a s corporation is nontaxable if it is:

Answer 1

Contribution of property
Solely in exchange for stock
After the transfer, the shareholder has more than 80% stock ownership

Question 2

When a corporation is formed, it is by default taxed as a c corporation. It is treated as an s corporation how?

Answer 2

If valid election form 2553 is filed

Question 3

Ray contributes property with a FMV of $20,000 and an adjusted basis to Ray of $10,000 in exchange for stock in falcon corporation, an S corporation. Immediately after the transfer, ray owns 20% of falcons stock. Determine rays realized gain or loss on the exchange and his basis in the s corporation stock.

Answer 3

20,000 - 10,000 = 10,000 realized gain
Because ray did not own 80% or more, it is a taxable transaction.

Question 4

What qualifications are needed to qualify as a s corporation?

Answer 4

Must consist of 100 or less shareholders that are all us people, estates, or trusts. And there may not be more than one class of stock outstanding, however, stock with different voting rights are allowed

Question 5

If an election to become a s corporation is made by march 15th of year X, when does the election take effect?

Answer 5

January 1 of that year (retroactive)

Question 6

If an election to become a s corporation is made after march 15th of year X, when does the election take effect?

Answer 6

January 1 of the following year

Question 7

After an election to become a s corporation is in effect, is consent of a new shareholder required?

Answer 7

No

Question 8

What is the general tax year for s corporations?

Answer 8

December 31 unless valid reason for otherwise, must file returns by March 15

Question 9

Although s corporations generally do not pay taxes, there are three different taxes that may be imposed if the s corporation was previously taxed as a c corporation:

Answer 9

LIFO recapture tax
Built-in-gain tax
Tax on passive investment income

Question 10

When does an unrealized built-in-gain result?

Answer 10

When a c corporation becomes a s corporation
AND
The FMV o the corporate assets exceeds the adjusted basis of the corporate assets on the election date

Question 11

What is the tax calculation for built-in-gain tax of a s corporation?

Answer 11

21% of the lesser of:
Recognized built in gain for the current year
OR
The taxable income of the s corporation if it was a c corporation

Question 12

When does tax on passive investment income for s corporations occur?

Answer 12

If the s corporates has accumulated c corporation earnings and profits
AND
Passive investment income exceeds 25% of total gross receipts

Question 13

What is the tax calculation for tax on passive investment income?

Answer 13

21% of the lesser of:
Net income
OR
Excess passive investment income

Question 14

Allocations to shareholders of pass through income and losses are made how?

Answer 14

On a per share per day basis

Question 15

Are s corporations shareholder’s share of ordinary business income subject to self employment tax?

Answer 15

No

Question 16

An s corporation is owned equally by 3 shareholders, rick, Tim and peter. On February 5th, peter sol his one-third interest in the corporation to George. For the year ended December 31, the corporation had ordinary business income of $120,000 and no separately stated items. Calculate each shareholders ordinary business income allocation.

Answer 16

Rick: 120,000 X 1/3 = 40,000
Tim: 120,000 X 1/3 = 40,000
Peter: 40,000 X 31/365 = 3,397
George: 40,000 X 334/365 = 36,603

Question 17

The following s corporation items flow through separately to the shareholder and are separately stated:

Answer 17

Rental real estate income or loss
Investment income
Dividend income
Royalties
Net short-term capital gain or loss
Net long-term capital gain or loss
Net section 1231 gain or loss
Charitable contributions
Section 179 expense deduction

Question 18

What is the section 199A qualified business income deduction?

Answer 18

A below-the-line deduction of 20% on ordinary business income

Question 19

Fringe benefits are deductible for non shareholder employees and employee shareholders who:

Answer 19

Own 2% or less of the s corporation

Question 20

How is a shareholders basis in s corporation stock calculated?

Answer 20

Initial basis
+ income items
+ additional contributions
- distributions
- loss/deduction items
= ending basis

Question 21

For an s corporation shareholder to deduct a loss, the shareholder must clear 4 hurdles in this order:

Answer 21

1. Tax basis limitation
2. At risk limitation
3. Passive activity loss (PAL) limitation
4. Excess business loss limitation

Question 22

A loss can only be flowed through to an s corporation shareholders individual income tax return to the extent of:

Answer 22

The shareholders tax basis

Question 23

What happens to the excess amount of loss not allowed to flow through?

Answer 23

Carried forward indefinitely
However, any excess due to insufficient tax basis remaining when the shareholder disposes of his/her stock is lost

Question 24

What is an s corporations shareholders “at risk” basis?

Answer 24

The stock basis + debt basis

Question 25

Hearty is a shareholder in a s corporation. He contributed $12,000 in cash and land with a basis of $25,000 and a FMV of $100,000. He also loaned the s corporation $15,000 which hearty borrowed on a non recourse basis. Hearty has $10,000 as his pro rata share of s corporation income that was not distributed. What is hearty’s stock basis? What is hearty’s debt basis? And tax basis?

Answer 25

12,000 cash
+ 25,000 property
+ 10,000 income
= 47,000 stock basis

15,000 debt basis

47,000 + 15,000 = 62,000 tax basis

Question 26

The accumulated earnings and profits during the years the corporation is an s corporation is:

Answer 26

The accumulated adjustments account (AAA)

Question 27

What causes increases to AAA?
What causes decreases to AAA?

Answer 27

Increases: ordinary business income & separately stated income and gain items
Decreases: ordinary business losses, separately stated losses an deductions, no deductible expenses, and distributions (but may not reduce below 0)

Question 28

An account that is designed to keep cumulative record of items that affect s corporation shareholders took basis it do not affect AAA:

Answer 28

Other adjustments accounts (OAA)

Question 29

Other adjustment accounts include:

Answer 29

Tax exempt interest on municipal bonds
Tax exempt life insurance proceeds
Federal taxes paid or accrued

Question 30

If a s corporation was never a c corporation, and has distributions to the extend of the shareholder’s stock basis, what is the tax result and treatment?

Answer 30

Not subject to tax, reduces the basis in stock
Return of capital

Question 31

If a s corporation was never a c corporation, and has distributions in excess of the shareholder’s stock basis, what is the tax result and treatment?

Answer 31

Taxed as long term capital gain (if held for more than 1 year)
Capital gain distribution

Question 32

If a s corporation that was a c corporation, and has distributions to the extent of the shareholder’s AAA account, what is the tax result and treatment?

Answer 32

Not subject to tax, reduces the basis in stock
S corporation profits

Question 33

If a s corporation that was a c corporation, and has distributions to the extent of the shareholder’s E&P, what is the tax result and treatment?

Answer 33

Taxed as a dividend, does not reduce basis in stock
Taxable dividend distribution

Question 34

If a s corporation that was a c corporation, and has distributions to the extent of the shareholder’s OOA account, what is the tax result and treatment?

Answer 34

Not subject to tax, reduces basis in stock
Nontaxable income/related expenses

Question 35

If a s corporation that was a c corporation, and has distributions to the extent of the shareholder’s stock basis, what is the tax result and treatment?

Answer 35

Not subject to tax, reduces basis in stock
Return of capital

Question 36

If a s corporation that was a c corporation, and has distributions in excess of the shareholder’s stock basis, what is the tax result and treatment?

Answer 36

Taxed as long term capital gain
Capital gain distribution

Question 37

An s corporation that used to be a c corporation had accumulated c corp E&P of 20,000, ordinary income of 100,000 and made shareholder distributions of 60,000 in year 8. The AAA balance was 40,000 and ordinary business income was 50,000 and made distributions of 120,000 in year 9. The tax result of the year 9 distribution is:

Answer 37

40,000 AAA + 50,000 ordinary income = 90,000 nontaxable
20,000 taxable dividend (E&P)
10,000 excess is nontaxable reduction in basis of stock

Question 38

S corporation status will terminate as a result of any of the following:

Answer 38

Shareholders holding more than 50% of the stock (voting & non voting)
Corporation fails to meet and s status qualifications
More than 25% of the corporations gross receipts are from passive income for 3 consecutive years (only if has prior c corp E&P)

Question 39

When is s corporation status terminated?

Answer 39

If filed by march 15, January 1 of that year
If filed after march 15, January 1 of the following year
If stats terminated due to failing to meet any of the s requirements, it is effective immediately

Question 40

Once a s corporation election has been terminated, the corporation must wait how long before r-election of s status?

Answer 40

5 years

Question 41

An s corporation makes a liquidating distribution of a building with a FMV of 100,000 and a basis of 60,000 to its sole shareholder. The corporation also had ordinary business income for the year of 10,000. The shareholder has a basis in the corporations stock of 30,000 at the beginning of the year. Determine the tax consequences of the liquidating distribution to the corporation and to its sole shareholder.

Answer 41

Corporation: 100,000 - 60,000 =40,000 gain

Shareholder: 30,000 + 10,000 + 40,000 = 80,000 stock basis before distribution
100,000 - 80,000 = 20,000 gain on distribution