Eligibility and Election Flashcards
True or False.
An S corporation may have multiples classes of stock.
FALSE.
An S corporation must have only one class of stock
Note: Variation in voting rights of that one class of stock is permitted. Rights to profits and assets on liquidation must be identical
True or False.
The number of shareholders in an S corporation may not exceed 25.
FALSE.
The number of shareholders in an S corporation may not exceed 100
Note: Spouses are considered a single shareholder for this purpose
WHAT are the rules surrounding “new election” after an S Corporation goes through revocation or termination?
THEY cannot be effectively made for 5 years without IRS consent
WHAT is a “accumulated adjustments account (AAA)?”
An account that represents the current cumulative balance of all the separately stated items and nonseparately stated items (ordinary) of an S corporation
Note: It is calculated without regard to any net negative adjustments (excess of losses and deductions over income and gains)
WHEN is a tax-exempt organization required to file Form 990 “Return of Organizations Exempt from Income Tax?”
BY the 15th day of the fifth month following the close of the taxable (e.g. May 15th of 2019 as close of tax year 2018)
WHO must an organization apply to in order to receive tax exempt status?
THE IRS district director
i.e. They must apply in writing to its IRS district director for a ruling or a determination that it is tax-exempt
WHAT is the result of a domestic or foreign exempt organization that receives more than a third of its support (annually) from its members and the general public?
A Private foundations becoming public charities
i.e. private foundation status terminates, and the organization becomes a public charity
WHAT is an allowed deduction for an S corporation?
Compensation of officers
WHAT tax rate should be used for unrelated business taxable income if an exempt organization is a corporation?
The corporate income tax rate
i.e. unrelated business taxable income (over $1,000) should be calculated at the corporate income tax rate (i.e. 21%)
WHAT is the penalty imposed on an S corporation for failure to file an S corporation return within 2 ½ months of the end of the tax year?
Take the number of persons who were shareholders during any part of the year multiplied by $200 for each person of up to 12 months
WHAT is the tax penalty for an exempt organization that elects to replace a substantial part of their activities with a lobbying expenditure?
AN excise tax of 25% of the excess amount
e.g. Organization has $20,000 election amount. Their actual expense is $30,000; Excise tax would be = $30,000 - $20,000 x 25%
How is a C corporation (converted to an S corporation) taxed on their net appreciation inherent in its assets?
ON their net gain recognized up to the amount of built-in gain on conversion
i.e. they are subject to a tax of 21% on net gain recognized (during the recognition period)
Note: This is considered a tax liability passed through, as a loss, pro rata to its shareholders, and it reduces each shareholder’s basis in the stock
True or False.
Earnings and Profits (E&P) distributions are taxed as a dividend, reduce E&P, and reduce basis in stock.
FALSE.
Earnings and Profits (E&P) distributions are taxed as a dividend.
i.e. These distributions are taxed as a dividend, reduce E&P, but do NOT reduce basis in stock
WHAT is a description of a for-profit organization that pays all profits to exempt organizations?
A “Feeder” organization not qualified for exempt status
WHY? - because it “feeds” its profits to another organization
True or False.
A shareholder’s pro rata share of passed-through losses in excess of basis in the S corporation is deductible
FALSE.
A shareholder’s pro rata share of passed-through losses in excess of basis in the S corporation is NOT deductible
Note: Any excess loss over adjusted basis is suspended and carried forward indefinitely
WHAT types of organizations/ individuals cannot be S Corporation shareholders?
- Charitable Remainder Unitrusts (CRUT)
- Charitable Remainder Annuity Trusts (CRAT)
- Partnerships
- Nonresident aliens (NRA)
WHEN would exemption status be lost for an otherwise qualified social club?
- Any net earnings benefit any private shareholder; OR
- Nonmember receipts exceed 35% of total receipts
WHAT is the includible gross income amount when a shareholder of an S corporation receives Cash or property distributions (yet the corporation did not have sufficient earnings and profits to pay taxable dividends)?
$0
i.e. Cash (or property) distributions received by shareholder reduces their basis in the stock of the S corporation, and they are NOT required to include the cash distribution in gross income
HOW are the amounts treated for an S Corporation that makes distributions in excess of their shareholder’s basis?
THEY are taxed as capital gains
i.e. Excess over basis is treated as gain on the sale of the stock
What is the maximum amount of passive investment income that an S Corporation is allowed to earn (and still qualify as an S corporation)?
THERE is NO limit on passive investment income
i.e. There is no limit on the amount of passive investment income that a corporation can earn and still qualify as an S corporation.
WHAT must a Tax-Exempt Organizations (Not Required to File Form 990 or 990-EZ) submit to the IRS?
A form Form 990-N, Electronic Notice (Organizations with under $50,000)
i.e. They must submit a Form 990-N (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ
Note: This is due by the 15th day of the fifth month following the close of the tax year
