Chapter 11 Flashcards
Can S-corp own stock in C-corp
Yes
C-corp may not be a shareholder in S-corp, only individuals, estates. S-corp is not publicly traded
S-Corp shareholder requirements
On each day of the year
• not more than 100 shareholders
• only individuals, estates, trusts (2 year holding period for trusts)
• only US citizens or US residents
How many S-corp have one owner?
About 61% in 2009
S-Corp corporation requirements?
1) Must be a domestic corporation
2) Must not be an “ineligible” corporation (have special tax status like bank or insurance company, or PR tax credit)
3) Must have only one class of stock
S-corporations are exempt from which taxes?
Federal income tax, AE tax, PHC tax, corporate AMT
How is S-corporation election made?
File Form 2553 any time before tax year, or before the 15th day of the 3rd month of the year the election is to be effective
How many shareholders must consent to S-corp election?
ALL shareholders.
If election is made after the beginning of the tax year, all who own stock at any time during the preceding year (even if not a current shareholder) must give consent.
What form do shareholder report s-corp income?
Ordinary income - Form 1120s
Separately stated - Schedule K
S-corp election terminates when?
On the day of the terminating event:
- exceeding 100 shareholders
- ineligible shareholder
- second class of stock
- failing passive income test for 3 consecutive years
What is the passive income test?
applied annually
terminates s-election if >25% of gross receipts are passive income for past 3 years AND corp has E&P from c-corp earnings
terminates s-election first day of next tax year
Allocation of income after termination of s-corp
terminating event occurs on day other than first day of tax year
S short year begins on first day of tax year and ends on day preceding termination date
C short year begins on termination date and continues through end of the tax year
How long must company wait to make new election after termination?
five tax years
S-corp taxable year?
ending 12/31 most common (calendar year)
What does Section 444 allow?
election of a fiscal year other than calendar year
When is S-corp allowed to use other than calendar year?
- Ownership year (more than 50% of shareholders use this tax year)
- Natural business year
- Facts & circumstances
What accounting method do most s-corp use?
Accrual is most common
must use same method for tax accounting
Name some separately stated items
- Net ST capital G/L
- Net LT capital G/L
- Charitable contributions
- Dividends and interest payments
- taxes paid/accrued to a foreign country
- Investment income/expense
- Tax-exempt interest
S-Corp cannot claim the following deductions
- dividends-received deduction
- US production activity deduction
both of these pass-through to shareholders
Can S-corp amortize start-up expenses?
S-corp can amortize organizational expenditures (Sec 248) after deducting up to $5,000
Carryover/carryback with status change
No carryovers/carrybacks originating in C-corp carry to S-corp
No carryovers/carrybacks originating in S-corp carry to C-corp
Losses from S-corp…
pass through to the shareholder, and if > shareholder’s income for the year can create a NOL carryover/carryback for the shareholder
Name 4 special S-corp taxes
1) Excess net passive income tax
2) Built-in gains tax (Sec 1374 tax)
3) LIFO recapture tax
4) recapture of business tax credits
What is Sec 1375 tax (excess passive income tax)
applies when s-corp has >25% passive investment income and has c-corp aE&P
How is excess net passive income tax calculated?
Excess net passive income x highest corp tax rate (35%)
Excess net passive income = net passive income x (passive inv inc - 25% of gross receipts)/passive inv inc
What is built-in-gains (Sec 1374) tax?
tax on gain of FMV of assets that were obtained while c-corp (before s-election was made)
purpose was to prevent taxpayers from avoiding corp tax by making s-election before distributing/selling assets. On day of conversion, must have appraisal of all assets on BS. If FMV>tax basis, record built-in gain
LIFO recapture tax
(FIFO inventory basis - LIFO inventory basis) at the close of last c-corp tax year
LIFO recapture amount is included in gross income & increases basis of inventory
Tax is payable in 4 installments of 25% each year
Income allocation procedures
1) to each day (divide amount by number of tax days)
2) to each share (divide daily amount by shares outstanding)
3) totaling daily allocation for each share of stock
4) totaling amount held by stockholder
Shareholder loss limitation
loss is limited to adjusted basis of stock + indebtedness owed directly to the shareholder
How is the stock basis limitation for loss calculated
1) Increase basis by any capital contributions
2) Increase basis for ordinary income and separately stated income/gain
3) Decrease basis for distributions not included in shareholder income
4) Decrease basis for nondeductible, noncapital expenditures
Does s-corp loss transfer?
If stock is sold with unused losses, these do not transfer. If stock is transferred to a spouse or former spouse, the losses transfer and can be deducted when sufficient basis is obtained
Name 3 special loss/deduction limits for s-corp shareholders
1) At-risk rules: shareholder can deduct loss only to the extent the shareholder is at risk
2) Passive activity limitation: must meet materially participation 7 rules or s-corp loss cannot be deducted against salary or “active” income
3) Hobby loss: must have positive income for 3 of 5 business years
Who is responsible for tracking shareholder basis
the shareholder must adjust basis annually
What increases shareholder basis
Initial investment
+ capital contributions
+ allocable share of ordinary income
+ allocable share of separately stated income/gain
What decreases shareholder basis
- Distributions excluded from shareholder’s gross income
- allocable share of any expense not deductible as ordinary
- allocable share of ordinary loss
- allocable share of separately stated loss/deduction items
Does non-taxable income increase shareholder basis?
Yes.
Ordinary and separately stated items increase basis whether taxable, tax-exempt, or receive preferred tax treatment
Describe s-corp distribution if firm made s-election in initial tax year
Distributions are non-taxable & reduce shareholder’s basis, not below 0.
If distribution > basis, treat as gain from sale/exchange
How is stockholder basis calculated
In ORDER
Basis \+ capital contributions \+ allocable share ordinary income \+ allocable share sep stated items - Distributions - allocable share of ordinary loss - allocable share of separately stated loss = ADJUSTED BASIS FOR STOCK
S-corp file what tax forms?
Form 1120s & Schedule K
What is schedule K-1
s-corp furnishes, shareholder’s share of income/deduction/credits
Must s-corp make estimated tax payments?
Yes, if estimated tax liability >$500
How many corporations are s-corp?
66.8% in 2011
When is calendar-year S-corp tax return due?
March 15
