Module 1: S Corporations Flashcards
Form 2553
Form to elect to be treated as an S corp
When would a contribution be tax-free?
If it is:
- a contribution of property (not services)
- Solely in exchange for stock
- After the transfer, the shareholder has control of the corp through 80% stock ownership
What requirements must be met to qualify as an S corp?
- Qualified corp
- Domestic
- not consolidated with C corp - Eligible shareholders
- individual, estate, or certain types of trusts
- may not be a nonresident alien
- may not be corp or partnership - Shareholder limit
- 100 shareholders (family = one) - One class of stock
What form must S corps file and when is their tax return due?
1120S
March 15
What are the 3 principal taxes imposed on S corps?
- LIFO Recapture Tax
- Built-In Gains Tax
- Tax on Passive Investment Income
LIFO Recapture Tax
Resulting tax on the excess of inventory computed under FIFO over LIFO (cumulative basis)
When would an unrealized build-in gain result?
When the following 2 conditions occur:
- C corp elects S corp status; and
- FMV of corp assets exceeds adj. basis of corp assets on election date
What is the amount of built-in gain recognized limited to?
The net unrealized built-in gain less any build-in gain previously recognized
Under which circumstances is an S corp exempt from a tax on built-in gains?
- S copr was never a C corp
- Sale/transfer does not occur w/in 10 years of 1st day of 1st year of S election
- S corp can demonstrate that appreciation occurred after S election
- S corp can demonstrate distributed asset was acquired after S election
- Net unrealized built-in gain has been completely recognized in prior tax years
How is the tax on built-in gain calculated?
35% x the lesser of:
- recognized built-in gain for current year
- taxable income of S corp if it were C corp
When would a corp be subject to a 35% tax on the lesser of NI or excess passive investment income?
If the following 2 tests are met:
- S corp has accum C corp E&P (from prior years)
- Passive investment income > 25% of gross receipts
What are pass-through losses limited to?
Limited to the s/h’s adjusted basis in S corp stock + direct s/h loans to corp
What would increase the taxpayer’s at-risk amount?
- Contribution of cash or other property to the corp
- Loans to the corp
- Allocable share of income distributed
What would reduce the taxpayer’s at-risk amount??
- Allocable share of losses
2. Distributions of cash or other property
What items flow through to the s/h’s K-1?
- Ordinary income
- Rental income/loss
- Portfolio income
- Tax-exempt interest
- Percentage depletion
- Foreign income tax
- Section 1231 gains/losses
- Charitable contributions
- Expense deduction for recovery property (sec. 179)
- Unrecaptured sec. 1250 income
- Gain/loss from sale of collectibles
How are fringe benefits treated for S corps?
Deductible for non-shareholder employees and those employee shareholders owning 2% or less of S corp
How are the costs of fringe benefits treated?
Not deductible for shareholders owning over 2% of S corp
What increases the accum. adj. acct (AAA)?
Separately and non-separately stated income and gains
What decreases the AAA?
Corporate distributions, separately and non-separately stated expense items and losses, and nondeductible expenses
What is the other adjustments account?
A bookkeeping account that is designed to keep a cumulative record of items which affect S corporation s/hs’ basis but do not affect the AAA
(tax-exempt interest, federal taxes attributable to C corp years)
How is the S/H basis in S corp stock computed?
BASE
Basis (Initial basis) Add: - Income items - Additional s/h investments in corp stock Subtract: - Distributions to s/h - Loss or expense items = Ending basis
When would an S corp status terminate?
- Voluntary revocation
- Corp fails to meet any/all of eligibility requirements for S corp status
- > 25% of corp’s gross receipts come from passive investment income for 3 consecutive year and corp had C corp E&P at end of each year
How long does a corp have to wait after S corp election termination/revocation to make a new election?
5 years, unless IRS consents to an earlier election
How is the taxable gain/loss for s/hs calculated for liquidation distributions?
Cash
FMV property
= Taxable gain/loss
What is the order in which stock basis is increased or decreased?
- Increased for income items and excess depletion
- Decreased for distributions
- Decreased for non-deductible, non-capital expenses and depletion
- Decreased for items of loss and deduction
