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.

Question 7

Melanie is the sole stockholder of Machine Inc., an S corporation. Her basis in the stock as of the end of Year 4 is $43,400. During Year 5, Machine reported a loss of $19,000. During Year 5, Melanie received a distribution of $38,000 from Machine and guaranteed $11,000 of Machine’s corporate debt. What is Melanie’s total stock and debt basis in Machine Inc. as of the end of Year 5?
A. $35,400
B. $54,400
C. $24,400
D. $0

Answer 7

Choice “D” is correct. Before consideration of the loss limitation, the stock basis is $5,400 ($43,400 – $38,000 distribution). There is no debt basis because the guarantee of corporate debt does not create debt basis. Only direct loans to the corporation create debt basis. The loss of $19,000 is allowed up to the $5,400 stock basis and reduces total tax basis to zero.

Choice “A” is incorrect. $35,400 is the $43,400 beginning stock basis less the loss of $19,000 increased by the debt of $11,000. It does not consider the distribution of $38,000 and incorrectly includes the debt of $11,000.

Choice “B” is incorrect. $54,400 is the $43,400 beginning stock basis plus the debt of $11,000. It does not consider the loss of $19,000 or the distribution of $38,000. It also incorrectly includes the debt of $11,000.

Choice “C” is incorrect. $24,400 is the $43,400 beginning stock basis reduced by the loss of $19,000. It ignores the distribution of $38,000.

Question 8

Lane Inc., an S corporation, pays single-coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a 10 percent shareholder-employee in Lane. On Mill’s behalf, Lane pays Mill’s family coverage under the health insurance plan. What amount of insurance premiums is includable in Mill’s gross income?

A.	$4,800
B.	$0
C.	$7,200
D.	$720

Answer 8

Choice “C” is correct. $7,200 of insurance premiums (the amount of family coverage premiums, as indicated in the question) is includable in Mill’s gross income.

Rule: Fringe benefits paid by an S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning 2 percent or less of the S corporation. Other fringe benefits paid are deductible by the S corporation if included as part of gross income from the S corporation for the individual receiving the benefits (i.e., included as part of income on the shareholder’s W-2).

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