M1 S Corporations

Question 1

Three requirements for a PROPERTY contribution to be tax free in an S Corp?

If tax free, what value?

Answer 1

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

Question 2

Eligibility. Two entity types that are NOT eligible S-Corp shareholders?

Answer 2

Corporations

Partnerships

Question 3

Eligibility. Shareholder limit for an S Corp

Husband and wife considered?

Answer 3

100 US shareholders

husband/wife considered 1 owner not 2

Question 4

Eligibility. How many classes of stock are allowed for an S Corp? Which class of stock is NOT allowed?

Answer 4

MAY have more than one but different voting rights

*NO preferred stock

Question 5

S Corp tax year general rule

Answer 5

Calendar year (December 31) unless a valid business purpose for a FYE

Question 6

Generally who pays the tax

Answer 6

Shareholder (but certain exceptions)

Question 7

Three taxes that could be imposed on an S Corp

Answer 7

1) LIFO Recapture tax
2) Built-in Gains tax (FMV > basis)
3) Tax on Passive Investment Income

Question 8

Exemptions from recognition of built-in gain

Answer 8

• 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

Question 9

Calculation of built-in-gains tax

Answer 9

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

Question 10

Tax on Passive Investment Income. Two tests

Answer 10

1) S Corp has accumulated C corp E&P from prior years AND
2) Passive investment income exceeds 25% of gross receipts

Question 11

Allocation of S Corp income to shareholders is made on a ____ basis?

Answer 11

per-share, per-day basis (see example 2, page 7)

Question 12

S-Corp Loss Limitations. Can deduct up to ___ + ___

Answer 12

BASIS + DIRECT LOANS (*note difference to Partnerships = all loans increase basis not just at-risk)

Question 13

S-Corp Loss Limitations. How long are disallowed losses carried forward?

Answer 13

INDEFINATELY

Question 14

S-Corp Loss Limitations. How do shareholder guarantees affect basis?

Answer 14

DO NOT INCREASE OR DECREASE - no change to basis

Question 15

S-Corp Loss Limitations. Loan in which the shareholder is not personally liable

Answer 15

Nonrecourse loan (not considered in the at-risk basis amount)

Question 16

Fringe Benefits. Which shareholders can deduct fringe benefits?

Answer 16

less than 2% owners - all others are deductible to the S Corporation not to the shareholder

Question 17

Computes the tax effects of distributions paid to shareholders of an S Corp that has accumulated earnings and profits (E&P) since inception

Answer 17

Accumulated Adjustments Account (AAA)

Question 18

Computing Shareholder Basis in S Corporation Stock

Answer 18

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

Question 19

Loss Limitation on Basis - Pass Key

CAN deduct the pro rata share of S Corp loss subject to the following limitation:

Answer 19

Loss limitation =

Basis + Direct shareholder loans - Distributions

Question 20

Taxability of Distributions to S Corp Shareholders.
If NO Corporation E&P:
Distribution Tax Result? Treatment?
1st Extent of basis
2nd Excess of basis

Answer 20

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)

Question 21

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

Answer 21

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

Question 22

Terminating the S Election. (3 Ways)

Answer 22

• 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

Question 23

If S Election terminated, how long does it have to wait to reelect S Status?

Answer 23

5 years or ask IRS Permission

Question 24

Liquidation of an S Corp. Tax consequences to the Corp

Answer 24

FMV

------------------
Taxable gain/loss *Report on K1 to shareholder and increase basis

Question 25

Liquidation of an S Corp. Tax consequences to the shareholder.

Answer 25

Cash
FMV property

Taxable gain/loss