R3-M5 S Corporation Overview

Question 1

Election of S Corporation

Answer 1

1. In order for an S corporation election to be valid, it must be agreed upon, in writing, by ALL shareholders
2. In order to be effective for the current taxable year, the S corporation election must be made by the 15th day of the third month of the taxable year.
3. If the election is made after that date, it becomes effective on the first day of the next taxable year.

Question 2

S Corporation Termination

Answer 2

S Corporation status will terminate as a result of any of the following:

1. Shareholders holding more than 50% of the stock( voting and nonvoting) consent to a voluntary revocation.
2. The corporation fails to meet any of the qualifications for S status:
   - The corporation must be a domestic corporation
   - No more than 100 shareholders
   –Spouses, children, grandparents, grandchildren, Uncle , Aunt, first cousins and ex-spouses count as family members
   - Eligible shareholders must be individuals, estates, or certain types of trusts
   –A single-member LLC is a disregarded entity for federal income tax purposes and is therefore treated as an individual (Schedule C).

• An individual shareholder may not be a nonresident alien.
• Qualified retirement plans and 501(c)(3) charitable organizations may be shareholders: 401K is a permitted trust. IRA is not qualified as a shareholder.
• Corporations or partnerships cannot be shareholders
  –an LLC with more than one owner is treated as a partnership.
• No more than one class of stock outstanding
• Nonresident aliens cannot be shareholders
• S corporation can own shares in C corporation; but C Corporations cannot own shares in S corporations.

3. Excess passive investment income:
   - More than 25% of the corporation’s gross receipts are from passive investment income for three consecutive years and the corporation has prior C corporation E&P.

Question 3

Fringe Benefit paid by S Corporations

Answer 3

1. Deductible fringe benefit:
   -Non-shareholder employees and
   -Employee shareholders owning no more than 2% of the S corporation
2. If an employee shareholder owns > 2% of the S Corporation:
   - the only way the S Corporation can deduct the cost of fringe benefits is IF the corporation includes the benefits in the employee shareholder’s W-2 income.

Question 4

Separately Stated Items

Answer 4

Separately stated items flow through separately to the shareholder in a manner similar to a partnership (See Schedule K-1 for a complete list):

1. Passive Income, on Schedule E:
   –Rental real estate income or loss
   –Royalties
2. Passive Income, on Schedule B
   –Dividend income
   –Interest Income
3. To Schedule D:
   
   • Net STCG or STCL
   • Net LTCG or LTCL
   • Net Section 1231 gain or loss
4. to Schedule A, itemized deductions
   -Charitable Contributions
5. Section 179 expense deduction

Question 5

Distribution

Answer 5

Distribution is not taxable income, but the amount is provided to the shareholder on Schedule K-1 for calculation of basis in the S Corportation.