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Corporate Tax > Ch 11 Part 1 > Flashcards

Ch 11 Part 1 Flashcards

0
Q

How are S corporations treated for legal and tax purposes?

A

Treated as corporation for legal purposes

Treated as partnership for tax purposes

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1
Q

3 purposes for Congress’s creation of the S corporation

A

1 permit businesses to select particular form of business
organization without being influenced by tax considerations
2 provide aid to small businesses with taxation only on shareholder
Level
3 permit corps realizing losses to obtain tax benefit of offsetting
The losses against income at shareholder level

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2
Q

Advantage: S-corp. income is exempt from…

A

Corporate income tax

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3
Q

Advantage: S- corp’s losses

A

Pass through to its shareholders

Can be used to reduce taxes owed on other types of income

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4
Q

Advantage: undistributed income taxed to shareholder is…

A

Not taxed again when distributed unless distribution exceeds shareholder’s basis in his stock

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5
Q

Advantage: capital gains, dividends and tax exempt income

A

Are separately stated and retain their character when passed

Through to shareholders

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6
Q

Advantage: deductions, losses and tax credits

A

Separately stated

And retain character when passed through to shareholders

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7
Q

Advantage: splitting S corporation’s income

A

Possible among family members

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8
Q

Advantage: what 2 taxes are earnings that pass through to S-corp’s shareholders not subject too?

2) What other tax are S-corp’s not subject too?

A

Self-employment tax and accumulated earnings tax

2) personal holding company tax

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9
Q

Disadvantage: C corp. is treated as separate entity

A

C corp is treated as separate tax entity from its shareholders,
Thereby permitting its first $50k in income to be taxed at 15%

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10
Q

Disadvantage: earnings are taxed even if…

A

They aren’t distributed to S corp shareholders

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11
Q

Disadvantage: 2 taxes S corp’s are subject to that partnerships aren’t subject to?

A

1 Excess net passive income tax

2 built in gains tax

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12
Q

Disadvantage: dividends

A

Dividends received by S corp aren’t eligible for dividends

Received deduction

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13
Q

Disadvantages: special allocations

A

Not permitted for ordinary income or loss for S corp as they

Are in a partnership

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14
Q

Disadvantage: loss limitations

A

Smaller for S corp shareholder because treatment of liabilities

S corp shareholder’s can increase their loss limitations by
Basis if debt they loan to S corp, whereas partners can
Ratably share all partnership liabilities

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15
Q

Disadvantage: 3 rules S-corps are subject too that C - corps aren’t?

A

1 at risk
2 passive activity limitation
3 hobby loss rules

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16
Q

Disadvantage: shareholders

A

S corp restricted in number of shareholders it can have

C corps and partnerships aren’t

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17
Q

Disadvantage: tax year

A

Must use calendar year unless it can establish business purpose

Can’t use fiscal year

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18
Q

S election: revoked

A

Can be revoked or terminated any time with minimal effort

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19
Q

2 categories if S corporation requirements

A

1 shareholder related requirements

2 corporation related requirements

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20
Q

3 shareholder requirements that must be satisfied on each day of the tax year

A

1 corp must not have more than 100 shareholders
2 all shareholders must be individuals, estates, certain
tax-exempt organizations or certain kinds of trusts
3 none of the individual shareholders can be classified as
A nonresident alien

21
Q

100 shareholder rule

A

Members of a family and their estates count as 1 shareholder,
Lineal descendants within 5 generations apart

Unmarried or non family individuals that own stock jointly
Are considered separate shareholders

22
Q

Eligible shareholders

A

C corporations and partnerships can’t own S corp stock

Tax exempt organizations under sec. 501 can own S corp stock

23
Q

7 types of trusts can own S corp stock

A 
1 grantor trusts
2 voting trusts
3 testamentary trusts
4 qualified sub chapter S trusts
5 qualified retirement plan trusts
6 small business trusts
7 beneficiary controlled trusts
24
Q

Small business trusts

A

Complex trusts primarily used for estate planning

Can own S corp stock

25
Q

Alien individuals who are not US citizens

A

Can only own S corp stock if they are US residents or are
Married to US citizen of make election to be taxed as resident
Alien

S corp election terminates if alien purchased s corp stock
And does not reside in US without making appropriate election

26
Q

3 corporate related requirements that must be satisfied each day of the tax year

A

1 corporation must be domestic corp. or unincorporated entity
That elects to be treated as corp under check the box rules
2 corp must not be an “ineligible” corporation
3 corp must have only 1 class of stock

27
Q

2 ways corporations are ineligible to make an S election

A

1 Corporations that maintain special federal income tax status
Ex. Financial institutions and banks

2 corps that have elected the special Puerto Rico and
US possessions tax credit or special Domestic Intl. Sales
Cop. Tax deduction

28
Q

What are S corps allowed to own?

A

Can own stock of C corp without limitation on percentage of

Voting power or value held

29
Q

An S corp that owns the stock of a C corp, can’t participate in…

A

Filing a consolidated return

30
Q

Qualified Subchapter S Subsidiary (QSub) 4 things

A

1Domestic corporation that qualifies as an S corp,
2 is 100% owned By an S corp
3 where the parent elects to treat the subsidiary As a QSub
4 assets, liabilities, income, deductions, losses of QSub are
Treated as those if S corp parent and reported on parent’s
Tax return

31
Q

A second class of stock is not created if the only difference between the 2 classes of stock is…

A

Voting rights

32
Q

The determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is based on 6 things

A 
1 corporate charter
2 articles of incorporation
3 bylaws
4 applicable state law
5 binding agreements relating to distribution
6 liquidation proceeds
33
Q

Determine whether outstanding shares confer identical rights, what is not included? 3 things

A

1 time of death, divorce, disability or termination of employment

2 distributions made on basis of shareholder’s varying stock
Interests during year

3 distributions that differ in timing

34
Q

Debt instruments, corporate obligations and deferred compensation arrangements generally are…

A

Not treated as second class of stock

35
Q

2 safe harbors for characterizing corporate obligations as debt (instead of as second class of stock)

A

1 unwritten advances from shareholder that don’t exceed $10k
During tax year are treated as debt between 2 parties

2 obligations that are considered equity under general tax laws
But are owned solely by shareholders in same proportion as
Corp’s outstanding stock

36
Q

4 requirements for straight debt instruments to meet to not be treated as second class of stock if issued when S election is in effect

A

1 debt must represent an unconditional promise to pay certain
Sum of money on specified date or on demand
2 interest rate and interest payment dates must not be contingent
On profits, or the borrowers discretion
3 debt must not be convertible into stock
4 creditor must be individual, estate or trust eligible to be S corp
Shareholder

37
Q

The S corp election exempts a corporation from all taxes imposed by Ch 1 of the IRC except for 3 taxes

A

1 sec 1374 built in gains tax

2 sec 1375 excess net passive income tax

3 sec. 1363 LIFO recapture tax

38
Q

What 4 common taxes does the S election exempt the corporation from?

A

1 regular income tax
2 accumulated earnings tax
3 personal holding company tax
4 corporate alternative minimum tax

39
Q

In what 3 ways does an S election affect shareholders?

A

1 shareholders report pro rata share of S corp’s ordinary income
Or loss as well as separately stated items
2 shareholders treat most distributions as nontaxable recovery
Of their stock investments
3 shareholders’ stock bases are adjusted for shareholders’
Ratable share of ordinary income or loss and separately stated
Items

40
Q

The S election can only be made by…

A

Small business corporations

41
Q

When must an S election be made?

A

Before the 15th day of the 3rd month in the tax year wanted for
S election

Can be made later if IRS determines there was reasonable cause
To make the election

42
Q

Consent of shareholders

A

Each person who is a shareholder on election date must
Consent to election

Any shareholder who previously owned stock at the beginning
Of the tax year before the election date must also consent to
The election even when they no longer hold stock

43
Q

Revocation of election

A

Shareholders owning more than one half the corps stock
On day corp makes revocation must consent to revocation

Revocation made within 2.5 months of tax year is effective
For first of that tax year, anything after 2.5 months applies to
Next year

44
Q

S Corp requirements: shareholder related 3

A

1 corp may have no more than 100 SH, family members and
estates Count as 1 SH
2 all SHs must be individuals, estates, certain kinds of trusts,
Tax exempt organizations
3 all individual shareholders must be US citizens or resident
Aliens

45
Q

S Corp requirements: corporate related 3

A

1 corp must be domestic or unincorporated entity
2 corp must not be an ineligible corp
3 corp must have only one class of stock issued and outstanding
Differences in voting rights are ignored

46
Q

An unincorporated entity that makes an S election is automatically treated as…

A

Having elected to be taxed as a domestic corp under check the
Box regulations

47
Q

Ineligible corporation

A

Bank, other financial institution, insurance company or

Foreign corporation

48
Q

Making the S election: timing

A

Corp can make S election any time during tax year before 15th
Day of 3rd month of tax year for that tax year to be effective

Late elections effective next year unless corp obtains IRS relief
For reasonable cause

49
Q

Making the S election: approval

A

Each shareholder who owns stock on date corp makes election
must consent to election

If corp makes election after beginning of tax year, each person
Who was a shareholder during portion of the tax year proceeding
Election must consent to election

Corporate Tax (23 decks)

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