R3 C and S Corporation Taxation Pt 3

Question 1

What are the eligibility requirements for an S Corporation election?

Answer 1

1. Domestic Corporation
2. One class of stock (differences in CS voting rights are allowed)
3. Eligible shareholders must be individuals (no nonresident alien shareholders) estate, or certain or certain types of trusts (not corporations or partnerships)
4. One hundred shareholder limit

Question 2

Describe the 2 requirement for election of S Corporation status.

Answer 2

1. All shareholders must consent
2. Election must be made either at any time during the year immediately preceding the year for which the election will be effective or on or before the 15th day of the 3rd month of the election year ( and the election will be retroactive to the first day of the election year)

Question 3

How can S corporation status be terminated?

Answer 3

S corporation status will terminate as a result of the following:

1. Holders of a majority of the stock consent to a voluntary termination.
2. The corporation falls to meet any or all of the eligibility requirements.
3. More than 25% of the corporation’s gross receipts come from passive activities for 3 consecutive years and the corporation had C Corporation earnings and profits at the end of each year.

Question 4

What tax year must an S Corporation adopt?

Answer 4

An S corporation must adopt a calendar year unless a valid business purpose for a different tax year (fiscal year) is established.

Question 5

When does an unrealized built-in gain result?

Answer 5

An unrealized built-in gain results when a C corporation elects S corporation status and the FMV of corporate assets exceeds the AB of the corporate assets at the election date.

Question 6

When is an S corporation exempt from a tax on built-in gains?

Answer 6

1. The sale or transfer does not occur within 10 years of the first day of the first year that the S corporation election is made (5 years thru the period ending 12/31/13)
2. S corporation was never a C Corp
3. S corporation can demonstrate that the distributed asset was acquired after the S election
4. S corporation can demonstrate that the appreciation occurred after the S election
5. The net unrealized Built-in gain has been completely recognized in prior tax years

Question 7

How is the tax on BIG calculated?

Answer 7

BIG tax is 35% (the highest corporate tax rate) X the lesser of the following:

1. Net recognized BIG for current year or
2. Taxable income of S corporation as if the corporation were a C corporation

Question 8

What items must be separately listed on an S Corporation tax return (Sch K)

Answer 8

1. Ordinary income
2. Rental income / loss
3. Portfolio income (including interest, dividends, royalties, and all capital gains (loss)
4. Section 1231 gains and losses
5. Charitable contributions
6. Sec 179 deductions
7. Depreciation
8. Foreign taxes
9. Tax-exempt interest