R3- Pt2-5 Flashcards
How is an S-Corporation election made?
Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year
To make election, 100% of the shareholders must consent
- Consent of New Shareholders - Not Req.
How is an S-Corporation terminated?
- 50% of the shareholders must consent
- Fails to meet any or all eligibility requirements
- More then 25% of Gross Receipts come from Passive Income for 3 consecutive years
- Had C-Corp E&P at end of each year
- Effective immediately
What items are not included in calculating an S-Corporation’s ordinary income?
These items are included on Schedule K, not in ordinary income:
Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest)
How is S-Corporation shareholder basis calculated?
Beginning Basis
+Share of Income Items (including non-taxable income!)
+ Additional shareholder investments
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don’t take income below zero)
= Ending basis
What is the formula for an S-Corp Built-in Gains Tax?
FMV of Assets @ S-Corp Election Date
- Adjust. Basis of Assets
= Built-in Gain
x 35% Corporate Rate
What are the requirements for holding S-Corporation status?
- Domestic only
- Up to 100 shareholders allowed
- Only one class of stock allowed
- Calendar tax year only
What are the Eligible Shareholders for a S-Corporation
- Only individuals, estates and trusts can be shareholders
- No Foreign Shareholders
- Corporations & Partnerships aren’t Eligible
Built-in Gains resulted when 2 conditions occur:
- A C-Corp elects S-Corp Status
& - The FMV of the Corporate assets exceeds the Adjusted Basis of the Corporate Assets on the Election Date
S-Corporations are Exempt from a tax on ‘built-in gains’ under any circumstances:
- The S-Corp was NEVER a C-Corp
- Sale or transfer doesn’t occur within 10yrs
- Demonstrate the appreciation occurred AFTER the S Election
What is reported separately & Non-separately stated items in Net Income?
- Separately: Income & Deductions
- Non-Separately: Business Income or loss
How is Pass-through income allocated to Shareholders?
- On a Per-Share, Per-Day Basis
Pass-Through Losses are Limited to?
- A shareholder’s Adjusted Basis in S-Corp stock
- Plus direct shareholder loans to the Corp.
- Shareholder Guarantees do not increase Basis
Fringe Benefits are deductible for?
- Non-Shareholder Employees
Fringe Benefits are Non-deductible for?
- Cost of Fringe Benefits for Shareholders owning over 2%
Accumulated Adjustments Accounts Computes:
- Tax Effects of distributions paid to shareholders of a S-Corp that has Accumulated E&P since inception
What is the Tax result & Treatment for the 1st distribution to Shareholders NO C-Corp E&P?
- Distribution is to extent of basis in stock
- Not Subject to Tax, reduces basis in stock
- Treatment is Return of Capital
What is the Tax result & Treatment for the 2nd distribution to Shareholders wit NO C-Corp E&P?
- Distribution in Excess of basis of stock
- Taxed as long-term Capital Gain
- Treatment: Capital Gain Distribution
What is the Loss Limitation Calc. for a Shareholder to deduct on their personal Tax Return?
- Pro Rata Share in S-Corp
Basis
+ Direct shareholder Loans
- Distributions
= Loss Limitation
What is the Tax result & Treatment for the 1st distribution to Shareholders WITH C-Corp E&P?
- To Extent of Acc. Adjustments Account
- Not subject to tax, Reduces basis in Stock
- Treatment: S-Corp Profits - Already taxed
What is the Tax result & Treatment for the 2nd distribution to Shareholders WITH C-Corp E&P?
- To Extent of C-Corp E&P
- Taxed as dividend, Does NOT reduce basis in stock
- Treatment: Old C-Corp Taxable Dividend
What is the Tax result & Treatment for the 3rd distribution to Shareholders WITH C-Corp E&P?
- To Extent of Basis of Stock
- Not subject to Tax, Reduces basis in stock
- Treatment: Return of Capital
What is the Tax result & Treatment for the 4th distribution to Shareholders WITH C-Corp E&P?
- In EXCESS of Basis of stock
- Taxed as Long-term Capital Gain
- Capital Gain Distribution
When can a S-Corporation Re-Elect?
- 5 years after termination
- Unless IRS consents
To be Exempt, Organizations not included in ‘Section 501(c)(1) Must:
- Written Application & Approval by the IRS
- Become Incorporated
& - Issue Capital Stock
An Organization can lose ‘Exempt Status” if:
- Engage in activities to influence Legislation
- Participate or intervene in Political Campaigns
What Organizations are EXCLUDED from Section 509 Private Foundations?
- Max. 50% Charitable deduction donees
- Receiving more then 1/3 of their annual support from members
- Supporting organizations
- Public Safety testing Organizations
What is the Required Return for Private Organizations?
- Form 990-PF
- Discloses substantial contributors & amounts of contributions received.
Private Foundations will Involuntary terminate when?
They become Public Charities
Private Foundations will Voluntary terminate when?
- Achieved by notifying the IRS
- Status is not Permanent
Unrelated Business Income is?
- Derived from an activity that constitutes a trade/business
& - Regularly carried on
& - Not Substantially related to the Organization’s tax-exempt purposes
Taxation Rules & Deduction Amount for Unrelated Business Income?
- Comply with code provisions regarding installment payments of estimated payments
- $1,000 deduction, excess of is subject to tax
The Annual information Return for Unrelated Business Income states?
- Gross income, receipts, contributions, disbursements, etc
- Required of most organizations exempt from tax &
- Open to public inspection
What are the EXCEPTIONS of Unrelated Business Income?
- $50,000 or less gross receipts
- Churches
- High School- Religious
- Religious Orders
- Internal Support Auxiliary
- Societies- Missionary related
- Tax Exempt- Organized by Congress
‘Christ’
What is a Controlled Taxpayer?
- Any one or two taxpayers owned or controlled directly or indirectly by the same interests
& - Includes a taxpayer that owns or controls the other taxpayers
What is a Controlled Transaction (Transfer) ?
- Any transaction or transfer between 2 or more members of the same group of controlled taxpayers
What is Uncontrolled Comparable?
- The Uncontrolled transaction or Uncontrolled taxpayer that is compared.
What is a Comparable Uncontrolled Price (CUP)?
- Only for Tangible property
Ex- Sales, purchases, leases - Based upon reference to published market data
What is a Comparable Uncontrolled Transaction (CUT)?
- Only for Intangible property
Royalty payments
What are the 3 circumstances in which Federal Law Prohibits State/Local from imposing a Net Income Tax for Interstate commerce?
- Business consists of solicitation of orders for sales of tangible personal property
- Those orders are sent outside the state for acceptance or rejection
- Orders accepted then, filled by shipments from a point outside the state
A Shareholder’s basis in the stock of an S Corp is increased by the Shareholder’s pro rata share of income from?
- Tax- Exempt Interest
& - Taxable Interest
When must a tax exempt organization file a 990-T for Unrelated Business Income?
If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T
What are the requirements for a 501(c)3 organization?
Organized and Operated exclusively for exempt purposes
No earnings can benefit an individual or private shareholder
Cant attempt to influence legislation as a major part of its activities
Cant campaign politically
