EA Part 2-Passkey 16-17 S Corps &Farms Flashcards
Form 2553 Election by a Small Business Corporation
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.
S Corporation requirements:
- 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
Entities that cannot elect S Corp status:
- bank or thrift institutions that use reserve method of accounting for bad debts
- insurance company
- DISC - domestic international sales corp
- any foreign entity
S election is terminated if, for 3 consecutive tax years, corp. has:
- accumulated E&P
- derives >25% of gross receipts from passive investment income
- corp. creates a 2nd class of stock
S corp is always required to file a tax return ___ regardless of income or loss
1120S.
Must electronic file if $10 million or > in assets or 250 any type returns
A __-month extension of time requested using __
6-month
Form 7004 Automatic Extension of Time to File Certain Business Income Tax
*Must pay estimated tax if $500 or more
Form 1128
Application to Adopt, Change or Retain a Tax Year
Form 8716
Election to Have a Tax Year Other Than a Required Tax Year, is used to apply for tax year change under section 444
As with a partnership, all income of an S corp must be allocated to the SHs, even if it is not __
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.
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.
- excess net passive investment income
- Built-in gains (BIG) tax
- Investment credit recapture
- LIFE recapture
The tax rate on Excess Net Passive Income is
35%
Form 4255 Recapture of Investment Credit
If a C corp claims General Business Cr & converts to S status, the S corp may have to pay any recapture.
LIFO recapture tax is paid in __
4 equal installments, beginning on the due date of the final C corp return
Stock basis is adjusted annually, on the last day of the S corp year, in this order:
+ for income items & excess depletion
- distributions
- nondeductible, noncapital expenses & depletion
- items of loss and deductions
Fringe benefits paid to employees that are not SHs or who own <2% are deductible by the S corp and __
and tax-free to the employee.
If shareholder-employee owns >2%, then fringe benefits are deductible by the S corp and __
reportable as wages for income tax w/h on the SH-employee’s W-2.
If a C corp elects to become an S corp, it may have an AAA,
an accumulated adjustments account, to track undistributed income that has been taxed during the period its S election is in effect.
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.
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.
Farm & fishing special rules for estimated taxes:
If at least 2/3’s of business’ gross income comes from farming or fishing
Farmer does not have to pay estimated tax if he files his return and pays all the tax owed by the __
1st day of the 3rd month after the end of his tax year (usually March 1)
If farmer must pay estimated tax, he is required to make only one “required annual payment” by the __
15th day after the end of his tax year (usually Jan. 15)
Accounting methods for farmers:
- cash method
- accrual method
- Crop method: deduct entire cost of producing crop in year income is realized from crop
- combination (hybrid) method
Unique inventory methods available to farmers
- 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
Income reported on Sch F does NOT include gains or losses from sales or other disposition of:
*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.
An agricultural program payment is reported on Sch F and full amount is subject to __
self-employment tax.
Insurance proceeds, gov’t disaster payments, are generally taxable in the year they are received.
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.
Farmers can claim __% of the use of a car or truck as business use without __
75% any records (mileage log)
The carryback period for a farm with NOL is __
5 years.
Farmers may average all or some of their current year’s farmer income by allocating it to the three prior years. They use Schedule __
Schedule J. Only available to sole prop. or partnerships.
