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Corporate Tax > Ch 11 Part 3 > Flashcards

Ch 11 Part 3 Flashcards

0
Q

Unlike the partnership taxation rules, a shareholder cannot increase his stock basis by…

A

A Ratable share of general S corporation liabilities

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1
Q

Shareholder loss limitation

A

Shareholder deduction for ordinary loss and separately stated
items is Limited to:

(Adjusted basis in S corp stock)
+ (indebtedness owed directly by S corp to shareholder)

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2
Q

What 4 adjustments does a shareholder make in determining their stock basis limitation for loses?

A

1 increase stock basis for any capital contributions during yr.
2 increase stock basis for ordinary income and separately
Stated income or gain items
3 decrease stock basis for distributions not included in
Shareholder’s income
4 decrease stock basis for non deductible, noncapital
expenditures

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3
Q

Sequencing basis reduction for distributions ahead of losses means that distributions…

A

Distributions Reduce deductibility of S corp loss and deduction
Passthroughs

But losses don’t affect treatment of S corp distributions

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4
Q

When is the adjusted basis of S corp stock generally determined?

A

Last day of the year

If disposed before that date, bases is determined immediately
Before disposition

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5
Q

Loss and deduction pass through items are allocated to each

share of stock and reduce…

A

Each share’s basis

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6
Q

Once losses and deductions have reduced stock basis to zero, they then…

A

Reduce the basis of any debt owed by S corp to shareholder

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7
Q

Any loss or deduction pass through not currently deductible…

A

Is suspended until shareholder regains basis in his stock or
Debt

The carry over period is unlimited

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8
Q

Unused losses when shareholder sells or transfers to family member

A

If shareholder sells, unused losses are lost and the new shareholder
Doesn’t get them

If S corp stock is transferred to another family member, the
Unused losses are still available for that family member

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9
Q

3 special shareholder loss and deduction limitations

A

1 at risk rules
2 passive activity limitation rules
3 hobby loss rules

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10
Q

At risk rules (sec. 465)

A

Shareholder can deduct a loss from particular S corp activity
Only to extent the shareholder is at risk in S corp’s activity at
Year end

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11
Q

Passive activity limitation rules

A

Losses and credits from passive activity offset income earned
From passive activities in same or subsequent tax year

S corp shareholder must personally meet the material participation
Standard

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12
Q

Passive activity limitation rules: Material participation standard

A

S corp’s material participation in an activity doesn’t allow
Passive investor to deduct S corp losses against his or
Her salary and other active income

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13
Q

Hobby loss rules

A

S corp losses are subject to sec. 183 hobby loss rules unless
They can demonstrate profitable activity

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14
Q

Post termination loss carryovers

A

Loss and deduction carryovers incurred in S corp tax years
Can carry over to shareholder level even though S election
Terminated

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15
Q

Post termination transition period

A

Only period when shareholders can deduct post termination
Loss carryovers

Starts on termination date and ends one year after

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16
Q

During the post termination transition period, the shareholder can deduct the loss carryovers…

A

Only up to his adjusted basis of stock

Uneducated losses are losses forever

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17
Q

What is the allocation process of losses and deduction of S corporations?

A

Losses and deductions are allocated based on # of shares of
stock owned by each shareholder on each day of tax year

Special allocations of losses and deductions are not permitted

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18
Q

Termination of the S election requires the tax year be divided into 2 parts. The corporation can elect (with shareholder’s consent) to allocate the loss or deduction according to…

When is this election also available too?

A

The corporations accounting methods

Also available when shareholder’s interest in S corp terminates

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19
Q

Losses and deductions pass through on a…

A

Per share basis

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20
Q

Losses and deductions are limited to…

A

The shareholder’s basis in debt and stock

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21
Q

Losses and deductions that are not deducted…

A

Carry over to tax year where shareholder regains stock and

Debt basis

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22
Q

What is the time period of the loss and deduction carryover

A

Unlimited time period

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23
Q

When do unused loss carryovers lapse?

A

If shareholder transfers stock to anyone other than spouse

Or former spouse in incident of divorce

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24
Q

What 3 special loss limitations are S corp shareholders subject too?

A

1 at risk rules

2 passive activity limitations

3 hobby loss rules

25
Q

What separately stated loss and deduction item is subject to shareholder loss limitations?

A

Investment interest expense

26
Q

What other separately stated items are subject to corporate limitations but not shareholder limitations?

A

50% no deductible portion of meals and entertainment

27
Q

Section 1366 definition of family

A

Spouse, ancestors, lineal descendants and trusts created for
Such individuals

28
Q

How often must S corp basis be adjusted?

A

Annually

29
Q

Basis adjustments to shareholder’s stock equation

A

Initial investment (or basis at beginning of tax year)
+ additional capital contributions made during year
+ allocable share of ordinary income
+ allocable share of separately stated income and gain items
- distributions excluded from shareholder’s gross income
- (allocable share of any expense not deductible in determining ordinary income and not chargeable to capital account)
- allocable share of ordinary loss
- allocable share of separately state loss and deduction items
= adjusted basis for stock (but not less than 0)

30
Q

Why is determination of stock basis in an S corp. important?

A

To determine gain or loss on sale of stock and determine amount
Of losses that can be deducted

And determine amount of distributions to shareholders that are
Nontaxable

31
Q

What is the basis of stock purchased from another shareholder?

A

Cost basis

32
Q

What is the basis for stock received as part of a corporate formation?

A

Substituted basis from assets transferred

33
Q

What is the basis for stock acquired by gift?

A

Takes donor’s basis adjusted for gift taxes

Or FMV (if lower)

34
Q

Basis of stock acquired from decedent’s death?

A

FMV date of death or alternative valuation date (if elected)

35
Q

What is the basis adjustment when corporation makes initial S election?

A

No basis adjustment is made

36
Q

Basis of S corp stock inherited firm deceased shareholder?

A

FMV - corporate income that would have been income in

Respect of decendent

37
Q

Ordinary income and separately stated income and gain items, what is there effect on shareholder’s basis? Does it matter if they are tax exempt?

A

Increase shareholder’s basis whether taxable or tax exempt

38
Q

Ordinary income and separately state gain items first restore the basis of what?

A

First restore the basis of debt the corporation owes the S corp
Shareholder

Then it restore’s shareholder’s stock basis

39
Q

When does repayment of shareholder indebtedness result in gain recognition?

A

When repayment amount exceeds debt’s adjusted basis

40
Q

Character of repayment of indebtedness: if debt is secured by note, if not?

A

If debt is secured by note, gain is capital in character

If debt is unsecured, repayment is ordinary income

41
Q

Corporations that have no E&P: treatment of distributions

A

2-tier rule applies: distributions are initially nontaxable and reduce
Shareholders stock basis (not below 0)

If distribution exceeds shareholder’s stock basis, shareholder
treats excess as capital gain from sale or exchange of stock

42
Q

Can distributions that exceed stock basis be tax free to the extent of shareholder loans?

A

No, although amount of deductible losses can be increased
By amount of shareholder loans, nontaxable limitations are
Strictly limited to stock basis

Distributions never reduce debt basis

43
Q

If an S corporation distributes appreciated property to its shareholders, what are the tax consequences? 3 things

A

1 S-corp recognizes gain if it sold the property, taxed at corporate
Level as part of S corp’s built in gains or excess net passive
Income
2 shareholders basis reduced by FMV of distribution, and
shareholder is never taxed on shareholder level
3 Losses not recognized

44
Q

Accumulated adjustments account (AAA)

A

Account required for S corporations that have E&P from previous
C corp election

Account represents cumulative income and loss recognized
In S corp

45
Q

If AAA account is positive and sufficient basis exists in stock, then distributions are…

A

Non taxable and reduce stock basis

46
Q

Year end AAA balance equation

A

AAA balance at beginning of year
+ ordinary income
+ separately state gain items (except tax exempt income)
- distributions made from AAA
- ordinary loss
- separately stated loss and deduction items (except tax exempt)
- (expenses not deductible in determining ordinary income
And not chargeable to capital account)
= year end AAA (accu. Adjustments acct.) balance

47
Q

Source of money or property distributions made by S Corporations have accumulated E&P: classification - Accumulated adjustments account
What’s the Tier and treatment of the distribution from this account?

A

Tier 1

Nontaxable generally

48
Q

Source of money or property distributions made by S Corporations have accumulated E&P: classification - Accumulated E&P
What’s the Tier and treatment of the distribution from this account?

A

Tier 2

Taxable (dividend)

49
Q

Source of money or property distributions made by S Corporations have accumulated E&P: classification - Basis of S corporation stock
What’s the Tier and treatment of the distribution from this account?

A

Tier 3

Nontaxable generally

50
Q

Source of money or property distributions made by S Corporations have accumulated E&P: classification - Excess over stock basis
What’s the Tier and treatment of the distribution from this account?

A

Tier 4

Taxable (capital gain)

51
Q

5 differences exist between positive and negative adjustments required for AAA (accumulated adjusted account)

A

1 distributions not included in gross income reduce stock basis
Before negative adjustments, otherwise distributions reduce AAA
After negative adjustments
2 when net negative adjustment occurs it reduces AAA after
Distribution
3 tax exempt income doesn’t increase AAA but increases basis
In S corp stock
4 nondeductible expenses reduce stock basis and AAA (unless
Produce tax exempt income)
5 AAA can be negative but S corp stock basis can’t

52
Q

Allocation of AAA balance to individual distributions, when does it occur?

A

Occurs at year end after taking into account current year income
And loss items

53
Q

In general AAA balance is allocated ratably to individual distributions within a tax year based on…

A

Amount of money or FMV of noncash property

54
Q

Other Adjustments Account (OAA) when do corporations maintain it?

A

Maiif they have accumulated E&P at end of year

55
Q

Other Adjustments Account (OAA), what increases 1 and decreases 2 this account?

A

Increases: tax exempt income earned

Decreases: distribution out of OAA and federal taxes paid by
S corp attributable to C corp tax years

56
Q

Property distributions (other than money) made by S corporation with accumulated E&P: tax consequences, how do they affect AAA?

A

Trigger gain recognition

FMV of noncash property distributed reduces AAA

57
Q

Distribution ordering election, define, what are the benefits of this in an example?

A

S corp can elect to change the distribution order of E&P and AAA

Ex. Can elect to skip over AAA, by distributing straight from
C corp E&P can avoid excess net passive income tax and
Subchapter S termination

58
Q

Post termination transition period distributions

A

Nontaxable distributions of money made during S corp’s
Post termination transition period

Can be made to shareholders who owned S corp stock on
Termination date, come from AAA balance then from E&P

59
Q

Any distributions made from current or accumulated E&P and noncash distributions during post termination period are…

A

Taxable

60
Q

What happens to the AAA balance when the post termination period ends?

A

It disappears

61
Q

Profits earned during S election during post termination period: tax consequences on distribtutions

A

Can’t be distributed tax free from AAA

can be distributed tax free to extent shareholder’s stock basis
Once corp distributes all its E&P

Corporate Tax (23 decks)

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