Federal Taxation XI: S-Corp Tax, Estate/Gift Tax Flashcards
S-Corp Tax Characteristics (7)
- S s/h taxed on portion of income/loss, regardless of dist
- No imposition of corporate AMT, PHC, or accumulated earnings taxes
- Adj basis of s/h stock adj at year end
- S/H recognize gains when value of distributions exceeds adjusted basis in stock
- 2% or more s/h are not eligible to benefit from many fringe benefit exclusions
- 2% or more s/h can deduct premiums paid on health ins (in his/her name) as deduction for AGI as long as s/h has earned income from SC that exceeds total of all premiums paid
- S/H who work for SC are employees subject to payroll taxes, but not SE taxes
Default rules for S-Corps are C-Corp rules (6):
- no special provision for contribution of property to SC
- can elect to amortize organizational exp
- property dist take outside basis of FMV
- dist of built-in gain/loss property do not have any special implications for contributing s/h
- dist of appreciated property causes recognition of gain at corporate level
- no E&P calculation
S-Corp Eligible Entity
- no foreign corp
- certain members of affiliated groups, parents of subsidiaries, financial institutions not eligible
- SC may own 80% or more equity interest in C Corp
- SC may own qualified subchapter S Subsidiary
S-Corp Shareholder
- can be parent corp, but not subsidiary unless of another SC
- Estates (bankruptcy or testamentary) can be shareholders
- Trust can be s/h if grantor or testamentary
- special stock voting trusts and qualified S trusts can be s/h
- small business electing trusts/exempt entities are allowed as s/h
S-Corp Sharheholder limit
No more than 100 s/h
- members of family/estate are 1 s/h
- each beneficiary of a s/h trust is separate s/h
- co-owners of stock each count as 1 s/h
S-Corp Stock Requirements
Only one class of stock
- if shares vary only in voting rights, not considered two classes of stock
- convertible debt does not violate requirement unless and until it is converted into a 2nd class of stock
- uninsured treasury stock does not violate
S-Corp Election
Requires unanimous consent of shareholders
S-Corp Termination
- voluntary termination through majority vote
- involuntary termination through violation of eligibility requirement
- involuntary termination due to violation on limit on passive investment income exceeding 25% for 3 cons. yrs.
S-Corp Reporting Operations
- May use cash basis unless “tax shelter”
- Taxable income reported separately for each shareholder on K-1
- not entitled to most special corporate deductions (DRD)
- do not pay AMT, PHC or accumulated earnings taxes
- make most tax elections (instead of s/h making them)
S-Corp Adjusted Stock Basis Calculation
Initial Basis Plus: Additional Contributions Shareholder's share of: Corporate Income Exempt Income Less: Distributions from AAA/OAA (in following order): cash inventory and receivables other property Nondeductible Expenses Corporate Losses
S-Corp Loss Limitations
- Adjusted basis of stock limits loss deductions b/c basis can not be below 0
- Adj basis of loans to corp can be used for loss deductions once adj basis of stock is 0, but later increases in basis are used to restore basis of debt before basis of stock
- s/h may only deduct losses to extent they are “at risk” for investments in corp
- passive loss limits may also limit loss deductions depending on nature of corporate business and s/h participation in mgmt.
- unused losses are carried forward indefinitely
S-Corp Distributions in Excess of Adj Basis
taxed as capital gains. includes cash plus value of any property distributed
Built-in gain property
for purposes of tax on an SC, is appreciated property (value in excess of adj. basis) as of beginning of first year of S status
never imposed on corp that has always been SC
Gifts: Joint Ownership
creation of joint ownership interest without equal consideration from each co-owner is considered a gift of the excess contribution to the owner making a smaller contribution
Transfers that are not considered Gifts (3)
- Medical/Education paid directly to provider/school
- Political Contributions
- Satisfaction of an obligation
Gifts: Annual Exclusion
$14K per done per year - eliminates modest gifts from application of the gift tax
Present Interest
right to income or to enjoy property currently
Integration of Gift/Estate Tax
Transfer taxes are integrated so that taxable gifts affect tax base for estate tax.
Unlimited Deductions for estate/gift taxes
- Spouse
2. Charity
Unified Credit
provides that the first $5.34M of transfers from an estate/gifts will not trigger a tax liability
Gifts: Marital Deduction
- Unlimited
- Deduction amount = Transfer less exclusion
- Does not apply to gifts to spouse who is not US citizen, but $145K exclusion applies
Federal Gift Tax Formula
Current Gifts - 1/2 of split gifts \+ 1/2 of split gifts by spouse - ANNUAL EXCLUSION Less Marital and Charitable Deductions
= Current Taxable Gifts
+ Prior Taxable Gifts
= Cumulative Taxable Gifts
x Tax Rates
= Cumulative Tax
- Current Tax on Prior Taxable Gifts less remaining Unified Credit
= Gift Tax Payable
Gross Estate vs. Probate Estate
Probate estate = collection of decedent’s possessions for legal purposes
Gross estate = value of these possessions for legal purposes
Estate: Valuation of Property
Property included in gross estate is FMV at date of death or alternative valuation date (6 mo after death or on date property is disposed of)
Estate: Special Use Valuation
Allows realty to be valued at a current use that does not result in best/highest FMV.
- Available only to business conducted by decedent’s family
- Constitutes substantial portion of gross estate
- Property passes to qualifying heir of decedent
- Cannot exceed $1,090,000
Specific Inclusion in Gross Estate: Life Insurance
Proceeds included in gross estate if:
- decedent had incidents of ownership, such as right to designate beneficiary
- decedent’s estate or executor is beneficiary of the insurance policy
Specific Inclusion in Gross Estate: Jointly Owned Property
- value of decedent’s interest as tenant in common included in gross estate
- jointly owned property by husband/wife (right of survivorship or tenancy in the entirety) - 50% of value of property included in estate of first spouse to die
- jointly owned property with right of survivorship (unmarried) - portion of property includible = proportion of consideration decedent provided to acquire property
Specific Inclusion in Gross Estate: Retained Interests
Property transferred where the decedent retained an interest or a power
- retained life estate or power to alter, amend, revoke a transfer
- power to designate possession or enjoyment of property/income
Life Interest
interest in property that is retained for the life of the transferor.
Specific Inclusion in Gross Estate: Transfers within 3 yrs of death
Certain gifts includable:
- Transfers with retained interests, revocable transfers, transfers of life insurance
- Property is included at date of death value
- Gift tax paid on the gift is included in the estate for any gifts made within 3 years of death (“gross up” provision)
Estate: Marital Deduction
To qualify:
- spouse must receive property outright and be able to control its ultimate destination
- Qualified terminal interest property (QTIP) will qualify for the deduction
- No marital deduction for non-citizen spouses
Estate: Other Deductions
- Debts of Estate
- Final Expenses (funeral, attorney, accountant)
- Casualty/Theft Losses
- Charitable Contributions
Terminable Interest
fails due to a contingency or the passage of time (decedent grants spouse right to occupy a residence until such time as spouse remarries)
Estate Tax Computation
- add adjusted taxable gifts
- apply current tax rates to total transfers
- reduce tentative transfer tax by gift taxes paid/payable
- subtract unified/other credits
Federal Estate Tax Formula
Property Included in Gross Estate
- Expenses, Debts, and Losses
= Adjusted Gross Estate
- Marital and Charitable Deductions
= Taxable Estate
+ Adjusted Taxable Gifts (post 1976)
= Estate Tax Base
x Tax Rates
= Tentative Tax
- Gift Taxes on post 1976 gifts
- Unified Credit
- Foreign Death Tax Credit
- Taxes on prior transfers
= Estate Tax Payable
Generation-Skipping Tax
supplemental tax that prevents avoidance of transfer taxes by skipping one generation of recipions
