M1 S Corporations Flashcards
Three requirements for a PROPERTY contribution to be tax free in an S Corp?
If tax free, what value?
1) contribution of property (NBV) NOT services (FMV)
2) solely in exchange for stock
3) after the transfer, shareholders have at least 80% control
*NONTAXABLE = NBV
TAXABLE = FMV
Eligibility. Two entity types that are NOT eligible S-Corp shareholders?
Corporations
Partnerships
Eligibility. Shareholder limit for an S Corp
Husband and wife considered?
100 US shareholders
husband/wife considered 1 owner not 2
Eligibility. How many classes of stock are allowed for an S Corp? Which class of stock is NOT allowed?
MAY have more than one but different voting rights
*NO preferred stock
S Corp tax year general rule
Calendar year (December 31) unless a valid business purpose for a FYE
Generally who pays the tax
Shareholder (but certain exceptions)
Three taxes that could be imposed on an S Corp
1) LIFO Recapture tax
2) Built-in Gains tax (FMV > basis)
3) Tax on Passive Investment Income
Exemptions from recognition of built-in gain
- S corp was never a C Corp
- sale of transfer does not occur within 10 years of the first day of the first year the S election is made
- Appreciation occurred after the S Election
- Distributed asset was acquired after the S Election
- Net unrealized Built in gain (BIG) was completely recognized in prior years
Calculation of built-in-gains tax
35% times the LESSER of:
Recognized built-in-gain in the current year OR
Taxable income of the S Corp if it were a C Corp
Tax on Passive Investment Income. Two tests
1) S Corp has accumulated C corp E&P from prior years AND
2) Passive investment income exceeds 25% of gross receipts
Allocation of S Corp income to shareholders is made on a ____ basis?
per-share, per-day basis (see example 2, page 7)
S-Corp Loss Limitations. Can deduct up to ___ + ___
BASIS + DIRECT LOANS (*note difference to Partnerships = all loans increase basis not just at-risk)
S-Corp Loss Limitations. How long are disallowed losses carried forward?
INDEFINATELY
S-Corp Loss Limitations. How do shareholder guarantees affect basis?
DO NOT INCREASE OR DECREASE - no change to basis
S-Corp Loss Limitations. Loan in which the shareholder is not personally liable
Nonrecourse loan (not considered in the at-risk basis amount)
Fringe Benefits. Which shareholders can deduct fringe benefits?
less than 2% owners - all others are deductible to the S Corporation not to the shareholder
Computes the tax effects of distributions paid to shareholders of an S Corp that has accumulated earnings and profits (E&P) since inception
Accumulated Adjustments Account (AAA)
Computing Shareholder Basis in S Corporation Stock
Initial Basis
+Income items (separately and nonseparately stated items): includes tax-free income
+Additional shareholder investments in corporation stock
-Distribution to shareholders
-Loss or expense items
——————
ENDING BASIS
Loss Limitation on Basis - Pass Key
CAN deduct the pro rata share of S Corp loss subject to the following limitation:
Loss limitation =
Basis + Direct shareholder loans - Distributions
Taxability of Distributions to S Corp Shareholders.
If NO Corporation E&P:
Distribution Tax Result? Treatment?
1st Extent of basis
2nd Excess of basis
If NO Corporation E&P:
Distribution Tax Result Treatment
1st Extent of basis NOT taxable, reduce basis, return of capital
2nd Excess of basis TAXABLE LT Capital gain (if held > one year)
Taxability of Distributions to S Corp Shareholders.
If Corporation E&P:
Distribution Tax Result? Treatment?
1st Extent of AAA
2nd Extent of C Corp E&P
3rd Extent of basis
4th Excess of basis
Distribution Tax Result? Treatment?
1st Extent of AAA - NOT taxable, reduce basis, S Corp profits
2nd Extent of C Corp E&P - Taxed as dividend, no change to basis, Old C Corp taxable dividend
3rd Extent of basis - NOT Taxable, reduce basis, Return of Capital
4th Excess of basis - TAXABLE LT Capital Gain, capital gain distribution
Terminating the S Election. (3 Ways)
- Voluntary revocation (majority owners)
- Fails to meet any of the eligibility requirements
- More than 25% of gross receipts come from passive investment income for 3 consecutive years and has C Corp E&P at end of each year
If S Election terminated, how long does it have to wait to reelect S Status?
5 years or ask IRS Permission
Liquidation of an S Corp. Tax consequences to the Corp
FMV
------------------ Taxable gain/loss *Report on K1 to shareholder and increase basis
Liquidation of an S Corp. Tax consequences to the shareholder.
Cash
FMV property
Taxable gain/loss
