R3 M5 - S Corporation Overview

Question 1

Please list Separately stated items?

Answer 1

Question 2

What increase the accumulated adjustments account of an S Corporation ?

Answer 2

1. Separately Stated income and gain
2. Ordinary business income

Give me a list of Separately Stated Income
- Rental real estate income
- Interest Income
- Dividend income
- Net LT or ST Capital gain
- Net Section 1231 gain

Question 3

What decrease the accumulated adjustments account of an S Corporation?

Answer 3

1. Separately Stated losses and deductions
2. Nondeductible expenses (other than expenses related to tax-exempt income and life insurance).
3. Distribution (may reduce AAA)
4. Ordinary business loss

Give me a list of Separately Stated loss:
- Charitable Contribution
- Section 179 Exp Deductions

Question 4

What is the Termination of S Election

Answer 4

1. The 100 shareholders holding more than 50 % of stock (voting and nonvoting) decided to terminate the S Corporation.
2. The corporation fails to meet any of the qualifications for S status:
   - Corporate or partnership owners
   - Foreign owner
   - More than 100 owners

Keep in mind that a family counts as 1 owner (Grandparents, children, aunt, grandchildren etc.)

3 Excess passive investment income: More than 25% of the corporation’s gross receipts are from passive investment for 3 consecutive years and the corporation has prior C corporation earning and profit)

[If you have excess passive investment income of more than 25% but it’s not from C Corporation E & P –> Your S Corp will not be terminated.]

Question 5

Answer 5

Choice “D” is correct.

Rule:

A corporation that has always been an S corporation may have excess passive income without losing its S corporation status.
Shareholders of an S corporation must be: individuals, estates, a voting trust, a grantor trust, and/or a bankruptcy estate.

Choices “A”, “B”, and “C” are incorrect, per the above rule.

Question 6

An S corporation may deduct:

A.	Net operating loss carryovers.

B.	Compensation of officers.

C.	Foreign income taxes.

D.	Charitable contributions within the percentage of income limitation applicable to corporations.

Answer 6

Choice “B” is correct. An S corporation may deduct compensation of officers which is an ordinary and necessary business deduction as long as it is reasonable in amount.

Choice “A” is incorrect. Operating losses of an S corporation are passed through to the individual shareholders each year and are deductible by the shareholders subject to the basis limitations. Since the operating losses are passed through each year, S corporation net operating loss carryovers do not exist.

Choices “D” and “C” are incorrect. Charitable contributions and foreign income taxes are separately stated items that are passed through to the individual shareholders and are reported on their individual returns in accordance with their percentage ownership of the corporation and are subject to any limitations at that level.