Chapter 3 Section 2: Small Business Corporations (S Corps) Flashcards

1
Q

What is the general effect of S Corps?

A

All earnings and losses are passed through to the shareholders

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2
Q

Who are eligible shareholders?

A

Must be an individual, estate, or trust
May not be a nonresident alien
Can’t be a corporation or partnership

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3
Q

What is the shareholder limit?

A

100

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4
Q

Is preferred stock allowed?

A

No, but you can have differences in common stock voting rights

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5
Q

When does the election take effect?

A

After all shareholders consent to a valid election

By March 15, it is retroactive to the beginning of the year

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6
Q

What can S Corps use as tax years?

A

12/31 unless you have a good reason for otherwise

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7
Q

What are the three principal taxes on S Corps?

A

LIFO recapture
Built-in gains tax
Tax on passive investment income

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8
Q

Explain the built-in gains tax

A

Tax on sale of assets when these both occur:

  1. C Corp elects S Corp status
  2. FMV of corporate assets exceeds adjusted basis of assets on election date
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9
Q

How can you avoid the built-in gains tax?

A

When any of these occur:

  1. S Corp was never a C Corp
  2. Sale does not occur within 10 years of day the election was made
  3. S Corp can demonstrate that appreciation occurred after the election
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10
Q

Where do income or losses of the S Corp go?

A

To the shareholder on a K-1

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11
Q

Are fringe benefits deductible?

A

Yes, for non-shareholder employees

No, for shareholders owning over 2%, unless it includes the benefit in W-2 income

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12
Q

What is the Accumulated Adjustments Account?

A

Used to compute the tax effects of distributions paid to shareholders of an S Corp that has accumulated E and P since inception

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13
Q

What is the loss limitation for S Corp shareholders?

A

Basis + Direct Shareholder Loans - Distributions

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14
Q

Are distributions from an S Corp taxable to shareholders?

A

Usually not, unless it’s in excess of the basis of the stock. Then it would be a capital gain.

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15
Q

What if the distributions from an S Corp are using old C Corp E and P?

A

It’s taxed as a dividend

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16
Q

What things can occur to terminate an S Corp election?

A

Election to terminate
Corporate owner or foreign owner
More than 25% of receipts come from passive investments for three consecutive years

17
Q

When can the S Corp who lost S Corp status reelect it?

A

After 5 years