Chapter 3: S Corporations Flashcards
What is the accumulated adjustment account (AAA)?
The cumulative total of undistributed net income items for S corporation taxable years. A positive balance represents amounts that have already been taxed to shareholders while it was an S corporation.
What is a specified service trade or business (SSTB)?
A business involved in performing services.
- In the fields of health, law, or any business where the principal asset of the business is the reputation or skill of one or more of the employees/owners.
- Does NOT include engineering and architecture
- That consist of investing and investment management
How is basis calculated for an S corporation?
What are the conditions for a corporations to become an S corporation?
- No more than 100 shareholders (family members with common ancestor no more than 6 generations above and spouses treated as a single shareholder)
- All shareholders must be individuals (grantor and testamentary trusts ok)
- All shareholders must be residents or citizens of the US
- Corporation must be domestic
- There can only be one class of stock (each share must allocate an equal amount of income)
What is the qualified business income deduction and what is the overall deduction limited to?
The QBID is 20% of businesses QBI
Limited to the lesser of combined deductible QBI for all businesses owned or
20% x (Taxable income without QBID - Net capital gain)
What is the wage/property limitation for the qualified business income deduction?
Limited to the greater of 50% of W-2 wages
OR
25% of W-2 wages - 2.5% of unadjusted basis of all qualified property
What is the built in gains tax (BIG)?
What are accumulated earnings and profits (AEP) for a S corporation?
AEP is earnings and profits that were accumulated (and never taxed to shareholders) during C corporation taxable years
What is the basis limitation?
Losses are limited to the amount invested (stock basis) + amount loaned to the company (debt basis)
Basis cannot go below zero and are suspended until basis can absorb the loss.
When will S status of a corporation involuntarily terminate?
If passive investment income is greater than 25% of the corporations total gross receipts for each of the 3 consecutive years and if the corporation had AEP from being a prior C corporation.
What the equation for the specified service trade or business exception?
For the middle limit only. This is percentage of QBID deduction allowed to takefor SSTB.
100% - [(taxable income-threshold)/100,000]
How is the S corporation election made?
Can be made at any time on Form 2553, but must be made by the 15th day of the 3rd month of the tax year to be effective for that year
Must have unanimous support from shareholders
What are the seperately stated items on a K-1?
Capital gains and losses
Section 1231 gains and losses
Investment income (ex: dividends and interest)
Passive income (rent/royalty)
Chariable contributions
Section 179 depreciation election
Tax credits
Tax-exempt income
Non deductible expenses
What are the levels of eligibility for the QBI deduction?
What is the process to determine if distributions are taxable or not?
- Distributions to the extent of the accumulated adjustent account (AAA) are NON-TAXABLE
- Distributions in excess of AAA are ORDINARY DIVIDENDS to the extent of accumulated earnings and profits (AEP)
- Distributions to the extend of remaining stock balance are NON-TAXABLE (return of capital)
- Remaining distribution amount is treated as a gain on sale of stock
