M1-S Corporations Flashcards
If an S Corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
decreases the shareholder’s basis for the stock. The distribution is nontaxable to the extent of the shareholder’s basis.
The order in which stock basis is increased or decreased is important. Because both the taxability of a distribution and the deductibility of a loss are dependent on stock basis, there is an ordering rule for computing stock basis. Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order:
- Increased for income items and excess depletion
- Decreased for distributions
- Decreased for non-deductible, non-capital expenses and depletion; and
- Decreased for items of loss and deduction
In order to be effective for the current taxable year, the S corporation election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, it becomes effective on the first day of the next taxable year. (true or false)
true
Both tax-exempt and taxable interest income increase a shareholder’s basis in S corporation stock. (true or false)
true
S corporation status can be revoked if shareholders owning more than 50% of the total number of issued and oustanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, just the total. (true or false)
true
An S Corporation can only have one class of stock outstanding. One class of stock with different voting rights is allowed for S Corporations. (true or false)
true
Having common and preferred stock would constitute two classes of stock and would prevent a corporation from qualifying as an S corporation.
Individuals, estates, and certain trusts may be shareholders in an S corporation.
Grantor trusts, section 678 trusts, qualified Subchapter s trusts, certain testamentary trusts, and voting trusts are allowed to be shareholders in an S corporation.
An S corporation reports both separately state and non-separately stated (net business) items of income. The dividend income is a separately stated item and is not included in the calculation of net business income. (true or false)
true
A distribution or a sale of an S Corporation’s assets may result in a tax on any “built-in gain” at the corporate level. An unrealized “built-in gain” results when the following two conditions occur:
1) a C corporation elects S corporation status, and
2) the FMV of the corporate assets exceed the adjusted basis of corporate assets on the election date.
If the two conditions exists, the net unrealized built-in gain is the excess of the FMV of corporate assets over the adjusted basis of corporate assets at the BEGINNING of the year in which the S corporation status is elected.
The following S Corporation items flow through to the shareholder in a manner similar to a partnership. These are the separately stated items:
- ordinary income which includes recapture income and unearned revenue not related to rental activities and mark to market income
- rental income/loss, which includes recapture income and unearned revenue related to rental activities
- portfolio income (including interest, dividends, royalties, and all capital gains/losses)
- tax exempt interest
- percentage depletion
- foreign income tax
- section 1231 gains and losses
- charitable contributions
- expense deduction for recovery property (section 179)
- unrecaptured section 1250 income
- gain (loss) from sale of collectibles
IRC section 1366 controls the pass-through of S corporation income items to shareholders. In general, items are divided into separately stated items (items that could potentially affect the tax liability of the shareholders) and non-separately stated items. (true or false)
true
Non-separately stated items are lumped together and constitute the S corporation’s ordinary income.
Separately stated items are passed through to the shareholders (in a manner similar to partnerships) and retain their tax attributes to the shareholders.
Per IRC section 1368, the amount of any distribution to an S corporation shareholder is equal to the cash plus the FMV of any other property distributed. (true or false)
true
S Corporations that are former C Corporations with undistributed C Corporation earnings and profits are restricted in the amount of passive investment income they can realize without terminating their S election. The restriction is _____% of total gross receipts from passive investment income.
25%
The S election is terminated if the S Corporation has passive investment income greater than 25% of gross receipts for three consecutive years.
Allocations to shareholders are made on a per-share, per-day basis. (true or false)
true
An S corporation is subject to the “built-in gains” tax only if the S corporation had previously been a C corporation. (true or false)
True
The accumulated adjustments account (AAA) is increased by separately stated and non-separately stated income and gains (except tax-exempt income and certain life-insurance proceeds) (true or false)
true
