EA Part 2-Passkey 16-17 S Corps &Farms

Question 1

Form 2553 Election by a Small Business Corporation

Answer 1

Filed by a business in order to elect to become an S Corp.
Filing must be within 2.5 mths of the start of its tax year, or else election becomes effective on 1st day of following tax year.

Question 2

S Corporation requirements:

Answer 2

• no more than 100 SHs
• SHs must be U.S. Citizens or residents
• can only have 1 class of stock, but can have voting or nonvoting rights
• profits & losses must be allocated in proportion to each SH’s interest in business
• all SHs must give written consent for S Corp election

Question 3

Entities that cannot elect S Corp status:

Answer 3

• bank or thrift institutions that use reserve method of accounting for bad debts
• insurance company
• DISC - domestic international sales corp
• any foreign entity

Question 4

S election is terminated if, for 3 consecutive tax years, corp. has:

Answer 4

• accumulated E&P
• derives >25% of gross receipts from passive investment income
• corp. creates a 2nd class of stock

Question 5

S corp is always required to file a tax return ___ regardless of income or loss

Answer 5

1120S.

Must electronic file if $10 million or > in assets or 250 any type returns

Question 6

A __-month extension of time requested using __

Answer 6

6-month
Form 7004 Automatic Extension of Time to File Certain Business Income Tax
*Must pay estimated tax if $500 or more

Question 7

Form 1128

Answer 7

Application to Adopt, Change or Retain a Tax Year

Question 8

Form 8716

Answer 8

Election to Have a Tax Year Other Than a Required Tax Year, is used to apply for tax year change under section 444

Question 9

As with a partnership, all income of an S corp must be allocated to the SHs, even if it is not __

Answer 9

distributed. Income, gains, losses, deductions and credits are allocated to a SH on a pro-rata basis, according to # of shares owned on each day of the corp’s tax year.

Question 10

Although S corps are pass-through entities and generally not subject to taxation, they may have to pay income tax due to the following – usually triggered when switching from C corp to S.

Answer 10

• excess net passive investment income
• Built-in gains (BIG) tax
• Investment credit recapture
• LIFE recapture

Question 11

The tax rate on Excess Net Passive Income is

Answer 11

35%

Question 12

Form 4255 Recapture of Investment Credit

Answer 12

If a C corp claims General Business Cr & converts to S status, the S corp may have to pay any recapture.

Question 13

LIFO recapture tax is paid in __

Answer 13

4 equal installments, beginning on the due date of the final C corp return

Question 14

Stock basis is adjusted annually, on the last day of the S corp year, in this order:

Answer 14

+ for income items & excess depletion

• distributions
• nondeductible, noncapital expenses & depletion
• items of loss and deductions

Question 15

Fringe benefits paid to employees that are not SHs or who own <2% are deductible by the S corp and __

Answer 15

and tax-free to the employee.

Question 16

If shareholder-employee owns >2%, then fringe benefits are deductible by the S corp and __

Answer 16

reportable as wages for income tax w/h on the SH-employee’s W-2.

Question 17

If a C corp elects to become an S corp, it may have an AAA,

Answer 17

an accumulated adjustments account, to track undistributed income that has been taxed during the period its S election is in effect.

Question 18

If a SH in an S corp terminates his interest during the tax year, S corp may elect to allocate income and expenses as if the corp’s tax year consisted of two separate short tax years.

Answer 18

Must have consent of all affected SH’s, One statement for all terminating elections can be made by writing “Section 1377 Election Made” at the top of each affect SH’s Sch K-1.

Question 19

Farm & fishing special rules for estimated taxes:

Answer 19

If at least 2/3’s of business’ gross income comes from farming or fishing

Question 20

Farmer does not have to pay estimated tax if he files his return and pays all the tax owed by the __

Answer 20

1st day of the 3rd month after the end of his tax year (usually March 1)

Question 21

If farmer must pay estimated tax, he is required to make only one “required annual payment” by the __

Answer 21

15th day after the end of his tax year (usually Jan. 15)

Question 22

Accounting methods for farmers:

Answer 22

• cash method
• accrual method
• Crop method: deduct entire cost of producing crop in year income is realized from crop
• combination (hybrid) method

Question 23

Unique inventory methods available to farmers

Answer 23

• farm-price method: whether raised or purchased, each item is FMV-cost of disposition
• unit-livestock-price method: classify livestock by type & age, then use std unit price for each animal within a class

Question 24

Income reported on Sch F does NOT include gains or losses from sales or other disposition of:

Answer 24

*land
*depreciable farm equipment
*bldgs and structures
*livestock held for draft, breeding, sport or dairy
Report on Form 4797 Sales of Business Property, resulting in ordinary or capital gains or losses.

Question 25

An agricultural program payment is reported on Sch F and full amount is subject to __

Answer 25

self-employment tax.

Question 26

Insurance proceeds, gov’t disaster payments, are generally taxable in the year they are received.

Answer 26

But farmer can elect to postpone if:

• uses cash method of accounting
• crop ins proceeds received in same tax year the crops were damaged
• under normal business practice, income from damaged crops would have been reported in any tax year following the year damage occurred.

Question 27

Farmers can claim __% of the use of a car or truck as business use without __

Answer 27

75%
any records (mileage log)

Question 28

The carryback period for a farm with NOL is __

Answer 28

5 years.

Question 29

Farmers may average all or some of their current year’s farmer income by allocating it to the three prior years. They use Schedule __

Answer 29

Schedule J. Only available to sole prop. or partnerships.