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Corporate Tax > Ch 11 Part 2 > Flashcards

Ch 11 Part 2 Flashcards

0
Q

Passive income test 3 things

A

Applies annually

Terminates S election if more that 25% of corps gross receipts
Are passive investment income for 3 consecutive years

And corporation has Subchapter C E&P at end of each 3
consecutive years

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1
Q

6 common events that terminate S election status

A

1 exceeding 100 shareholder limit
2 having ineligible shareholder own stock
3 creating second class of stock
4 attaining a prohibited tax status
5 Selecting an improper tax year
6 failing passive income test 3 consecutive years

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2
Q

Passive investment income

A

Includes royalties, rents, dividends, interest, annuities and
Capital gains on stocks

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3
Q

Subchapter C E&P

A

Subchapter C E&P includes only earnings accrued in tax years

Where S election was not in effect

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4
Q

S termination year

A

Terminating event occurring at some time other than first
Day of tax year creates an S termination year

S termination year divided into S short year and C short year

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5
Q

S short year

A

Begins on first day of tax year and ends on day preceding

termination date

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6
Q

C short year

A

Begins on termination date and continues through last day of corporation’s tax year

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7
Q

Returns preparation for S short year and C short year

A

Prepared on separate returns

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8
Q

S corp can use either of 2 rules to allocate the termination year’s income between S short year and C short year

A 
1 general rule: allocates ordinary income/loss and separately
Stated items between S short year and C short year based on
# days in year

2 special election: corp can use normal accounting rules
To allocate, with consent of all shareholders of corporation

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9
Q

Inadvertent termination

A

Corporation can remain S corp with IRS approval

And necessary adjustments made to meet requirements
Of being an S corp

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10
Q

New election following termination

A

Corp must wait 5 years to make another S election after

termination unless it receives permission from IRS

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11
Q

Under regulation 1.1362-5 what 2 situations warrant an early reelection of an S corp?

A

1 more than 50% stock owned by persons who didn’t own
Stock on termination date

2 when event causing termination was not within control of
Corp or the SHs having substantial interest in corp and not
Part of plan to terminate election

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12
Q

Termination of an S election can potentially increase…

A

Corporate and shareholder taxes

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13
Q

What 4 steps can shareholders take to prevent untimely termination of an S election

A

1 monitor all transfers of S corp stock
2 establish procedures for S corp to purchase stock of deceased
Shareholders to avoid the stock being acquired by ineligible SHs
3 establish restrictions on transferability of S corp stock by having
SHs enter into stock purchase agreement
4 monitor passive income earned by S corp

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14
Q

Stock purchase agreement

A

Provides stock can’t be transferred without prior consent of
All shareholders

And if necessary consent can’t be obtained, corp will repurchase
Stock at specified price

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15
Q

Taxable year of S corp (sec 1378)

A

1 tax year ending December 31

2 any fiscal year for which corporation establishes business
Purpose

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16
Q

Section 1378 specifically notes that income deferral for shareholders is…

A

Not a necessary business purpose

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17
Q

When is a natural business year considered to end, when business has nonpeak and peak business periods?

A

Soon after close of peak business period

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18
Q

Ownership tax year

A

Same tax year used by shareholders owning over 50% of corp’s
Outstanding stock

Adoption of ownership tax year Permitted for S corps

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19
Q

Section 444 permits an S corp to elect a…

A

Fiscal year other than a permitted year

Having a deferral period of 3 months or less

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20
Q

A Sec. 444 election is not required of an S corporation that…

A

Satisfies the business purpose exception

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21
Q

What must an S corporation do that has elected a fiscal year under sec. 444?

A

Make required payments

Which approximate deferral benefit for fiscal year

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22
Q

2 accounting method elections for S corp shareholders

A

1 deduction and recapture of mining exploration expenditures

2 credit for foreign income taxes

23
Q

S corp: ordinary income or loss

A

Net of income other than separately stated items

24
Q

S corporation separately state items

A

Same as partnership separately stated items

25
Q

Calendar year (including certain 52-53 week years)

A

Permitted tax year unless an exception applies

26
Q

When will IRS grant approval for ownership year?

A

Tax year requested is same as shareholders owning more than
50% of corp’s outstanding stock

Test must be met on first day of year for which approval is
Requested

27
Q

When will IRS grant approval for natural business year?

A

25% or more gross receipts for each of 3 most recent 12-month
Periods are in last 2 months of requested tax year

28
Q

When will IRS grant approval for facts and circumstances year?

A

Corp establishes business purposes using facts and
circumstances of situation other than ownership year or
Natural business year

29
Q

Non permitted fiscal year

A

Sec. 444 election permits S corp to use otherwise nonpermitted
Tax year if deferral period is 3 months or less

And corp makes necessary required payments

30
Q

What form does an S corp report it’s separately stated items?

A

Form 1120S Schedule K

31
Q

The character of income, gain, deduction, loss or credit item

A

Does not change merely because item passes through to

Shareholders

32
Q

Deductions that can’t be claimed by S corporations 3

A

1 dividends received deduction
2 US production activities deduction
3 same deductions disallowed to partnership

33
Q

Same deductions disallowed to both partnership and S corp under sec. 703, 6 things

A 
1 personal and dependency exemptions
2 itemized deductions for individuals
3 tax paid or accrued by foreign country or US possession
4 charitable contributions
5 oil and gas depletion
6 NOL carry backs and carry forwards
34
Q

2 similarities S corps have with C corps

A

1 S corps can elect to amortize organizational expenditures

2 20% reduction in certain tax preference benefits if S corp
Was a C corp in proceeding 3 tax years

35
Q

Carryovers and carry backs when corporation status changes

A

No carryovers or carry backs that originate in C corp tax year
Can carry to an S corp tax year other than carryovers used to
Offset built in gains

No carryovers/carry backs created in S corp tax year can
Carry to C corp tax year

36
Q

What happens when losses from S corp tax year are greater than shareholder’s income for the year?

A

Can create NOL carryover or Carryback for shareholder

37
Q

What 3 special taxes is the S corporation subject too

A

1 excess net passive income tax

2 built in gains tax

3 LIFO recapture tax

38
Q

Excess net passive income (sec. 1375) tax, when does it apply?

A

Applies when S corp has passive investment income for tax
Year that exceeds 25% of gross receipts

And at close of tax year S corp has Subchapter C E&P

39
Q

Excess net passive income equation

A

Excess net passive income =
(Net passive income)
x ([passive investment income - 25% gross receipts]/ passive investment income)

40
Q

Excess net passive income tax is not a problem for…

A

A corporation that has always been an S corp

41
Q

Excess net passive income tax calculation

A

Excess net passive income x 35% (corporate tax rate)

42
Q

Built-in gains (sec. 1374) tax, what does it apply to? 3 things

A

Applies to any income or gain corp would have included in
Gross income while a C corporation

Only if the corp used the accrual method of accounting (built
In gain )

Applies over 10 year period beginning date S election took
Effect

43
Q

Built in loses

A

Any deductions or loses corp would have deducted while a
C corp had corp used accrual method

And that corporation reports beginning on 10 year period
Of jan 1 S election is made

44
Q

A recognized built in gain can’t exceed…

A

property’s FMV - adjusted Basis on first day of 10 year recognition
Period

45
Q

A recognized built in loss can not exceed…

A

Exceeds of property’s adjusted basis over its FMV on first

Day of 10 year recognition period

46
Q

The net recognized built in gain for tax year is limited to smaller of excess of 3 things

A

1 net unrealized built in gain
2 total net recognized built in gain for prior tax years beginning
In 10 year recognition period
3 S corp’s taxable income as if it were C corp, but no dividends
Received deduction or NOL deduction allowed

47
Q

If the net if the recognized built in gains and losses exceeds the corporation’s taxable income and the corporation made an S election after March 30, 1988, the excess built in gain…

A

Carries over to the next tax year

Where it may be subject to built in gains tax in the carryover year

48
Q

LIFO recapture tax

A

If C corp uses LIFO inventory method makes an S election

They are required to include LIFO recapture amount in
Gross income for last C corp tax year

49
Q

LIFO recapture amount

A

(Excess of inventory’s basis for tax purposes under FIFO)/

Basis under LIFO at close of final C corp tax year

50
Q

S corp’s inventory basis is increased by…

A

The LIFO recapture included in gross income

51
Q

LIFO inventory recapture is paid in…

A

Installment payments

52
Q

Income allocation procedures for S corp shareholder

A

Shareholders must report pro rata share of ordinary income/loss
And separately stated items for S corp tax year

Allocated on per day/per share method

53
Q

Special allocations

A

Permitted for partnerships but not S corporations

54
Q

Allocation of loss

A

Occurs on daily basis

Corporate Tax (23 decks)

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