R3- M5- S Corporation Overview

Question 1

C corporation Criteria before electing to be an S Corporation

Answer 1

1. Domestic corporation

It can own stocks on another C Corporation even 100% that’s fine but it cannot file a consolidated return with that Investee C corp.

It can create an S Corp subsidiary and invest 100% stock- file as one entity

2. Eligible shareholder

Individuals, trusts, trusts, qualified retirement plans, 501 c organizations
INDIVIDUAL Shareholder CANNOT BE A NON RESIDENT ALIEN
Corporations (C corp) and Partnerships are NOT ALLOWED

3. Up to 100 shareholders
4. One class of stock

Common stock with different voting stocks are ok
But NO PREFERRED STOCK is allowed

Question 2

Taxable year and ITR due date

Answer 2

Calendar year- Form 112OS
March 15- 15th day of the 3rd month

NOT APRIL 15!!!

Question 2

S Corp status election

Answer 2

ALL Shareholders must consent
On or before March 15- takes place jan 1 of the current year

After March 15, Jan 1 of the following year

Form 2553

Question 3

EVENTS THAT COULD TERMINATE THE S CORP STATUS

Answer 3

1. Voluntary revocation
   Shareholders owning MORE THAN 50% consent to the revocation

Effective on the specified date, otherwise
Filed on or before March 15- Takes effect Jan 1 of the CY

Filed AFTER March 15- Takes effect Jan 1 of the Following year

2. Any of the Basic qualifications as mentioned on the first slide have not been met

EFFECTIVE IMMEDIATELY!

3. Passive Investment income is MORE THAN 25% for 3 consecutive taxable years ONLY if the corporation has PRIOR Earnings and Profits (from being a C Corporation) .

The termination will take effect Jan 1 of the 4th year

On the 4th year, its going to be MORE THAN 90% Passive income Receipts for the status to be TERMINATED.

Question 4

Fringe Benefits

Answer 4

Deductible by S Corp in calculating Ordinary Business Income
- Non shareholder employee
- Shareholder employee owning 2% and less

Not deductible if for SH owning
OVER 2% and treated as Includible in the Gross Income of the shareholder in his schedule C - little company!

unless that’s included in Shareholder’s W-2 then C Corp can DEDUCT it as expense

Question 5

ORDINARY BUSINESS INCOME FOR S CORP

Answer 5

Gross Income
LESS
COGS
Allowable expenses subject to ordinary tax rates- if they are deductions with different tax rates, limits etc then they are exluded here and reported as Separately Stated Items

= ORDINARY BUSINESS INCOME

Question 6

Short tax years

Answer 6

s corp election can result in 2 short tax years one being an s corp and the other part being a c corp

This happens due to the ff:

Voluntary revocation that specified date of effectivity

or failure to meet one of the requirements of S Status

In this case:

1. Allocate based on relative no of days
2. Close the books on the date of conversion

Question 7

Re electing S Status

Answer 7

Beginning of the fifth year after the year of termination

Question 8

Guarantee of Corporate debt and debt basis in an S corp

Answer 8

Guarantee of Debt does not create a debt basis

Only direct loans to the corporation create debt basis.

Question 9

Business interest expense like savings account interest

Interest income from a business account

Is this part of the ordinary business income or separately stated Item?

Answer 9

Business interest expense like savings account interest is deducted as part of Ordinary Income. so its not an SSI

Only investment interest expense is an SSI subject to up to interest income+ 30% of TI + Floor plan on Inidvidual shareholder’s return

But the interest income is an SSI

Question 10

Tax Basis of a C corp

Answer 10

C Corporations are not flow through entities and the owner’s basis is not affected by profits, losses, or loans made by the corporation.

Question 11

LIMITED LIABILITY COMPANY
LLC tax basis

Answer 11

Limited liability companies, absent an S corporation election, are taxed as C corporations or partnerships,

C corp is not flow through not affected by tax basis

Question 12

Is Tax exempt Income and Non deductibleexpense included in the tax basis computation of an S CORP?

Answer 12

A shareholder’s basis in an S corporation is increased by his or her proportionate share of all income, including TAX EXEMPT INCOME

Question 13

Can an S corp has 1 sole shareholder?

Answer 13

Yes

Question 14

Tax basis and Accumulated Adjustment Account items differences

Answer 14

Tax basis computation include tax exempt income and expense related to tax exempt income

BUT

Accumulated AA does not include Tax exempt income and does not include expense related to tax exempt income

Question 15

Allocation basis of Ordinary business income/ loss and SSI gains/ loss

Answer 15

Percentage ownership of the shareholders in an S Corporation because this is a CORPORATION

Not the profit sharing agreement which applies to Partnership only

Question 16

S corp and partnership nuance

Answer 16

S corp separates Stock and debt basis

Partnership only maintains total basis combined stock and debt

s corp debt basis of partner is on the direct loan of partners to the s corp

partnership debt basis may both include partners liability and partnership liability

s corp allocation of ordinary business income and ssi are based on PERCENTAGE OWNERSHIP because its a corporation it has no PROFIT SHARING AGREEMENT

partnership is based on PROFIT SHARING AGREEMENT not necessarily the same with their percentage of ownership

s corp reinstatement of basis first applies to debt basis before stock

partnership does not have priority on reinstatement of basis

s corp has Accumulated adj account - this does not include tax exempt income and expense related to that tax exempt income

partnership maintains everything on the capitals account

partnership basis= ending capital account + debt basis