R3- S Corp/ Small Business Corp Flashcards

1
Q

What are the requirements to qualify as S Corp?

A

100 USA People Commong

a. Domestic Corporation
b. Eligible Shareholders-individuals, estate or certain trusts/ Partnership Corp not allowed
c. Not more than 100 Shareholders
d. One Class of stock, different voting right may be allowed, preferred stock not allowed

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2
Q

When does the election of S Corp takes place?

A
  • By March 15, retroactive effect beginning of the yr
  • All shareholders must consent
  • New Shareholders- consent not required after election is made
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3
Q

What is the S Corp tax yr?

A

General Rule: 12/31 Req’d
Unless valid business reason is established
Return date: March 15, if 12/31 YE

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4
Q

What are the tax consequences for S Corp?

A

No Tax on Corp
All earning pass through to shareholders
Certain exceptions apply

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5
Q

What are the types of taxes applicable to S Corp?

A
  1. LIFO Recapture tax

2. Built-in Gains tax

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6
Q

What is LIFO Recapture Tax?

A
  • C Corp that elect S corp
  • must include in taxable income for the last C Corp yr
  • the excess of inventory computer under FIFO over LIFO
  • the resulting tax on the C Corp may be paid in 4 installments
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7
Q

What is built in gains tax? When does it occur?

A

Built-in Gains Tax occurs

  1. C Corp elects S Corp status
  2. The FMV of the assets exceeds the adjusted basis of assets on election date
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8
Q

When do you get an exemption for Built-in Gains Tax?

A

An S Corp is exempt if

  1. S Corp was never a C Corp
  2. Sale of Transfer does not occur within 10 yrs of S Corp election
  3. S Corp can demonstrate the appreciated occured after S Corp Election
  4. If Assets were acquired after S Corp election
  5. Net unrealized built-in gain tax has been recognized in prior tax yr
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9
Q

How to do you calculate Built in Gains Tax?

A

35%
Lesser of
1. Recognized built-in gain for the current yr
OR
2. taxable income of the S Corp if it were a C Corp

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10
Q

When is there a tax on passive investment income for S Corp?

A

If 2 conditons
1. S Corp has accumulated C corp earnings and Profits i.e. from prior yrs
2. Passive investment income exceeds 25% of gross receipts
Eg. Royalties, Dividends, Interets, rents, annuities

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11
Q

What is the effect of S Corp election on shareholders?

A

Pass through of all income to shareholders even tax free income
Losses are limited to shareholder basis of stock + direct loans to corporations, guarantees do not increase basis
Allocations are per share per day basis

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12
Q

What are the fringe benefits?

A

a. deductible fringe benefits- deductible for non-shareholder employees and those employee shareholder owning 2% or less
b. Non-deductible fringe benefits- shareholder owning over 2% is not deductible to S Corp

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13
Q

What is AAA Accumulated Adjustments Account ?

A

Treat like bank account
AAA is zero on S Corp election
Increase - for gain or profits
Decrease- for distributions, not below zero

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14
Q

Computing shareholders basis is S Corp Stock?

A
B- Initial basis
A+ Income Items
  \+ Additional Shareholder investments in Corp
S- Distribution to shareholders
  -  Loss or expense items
E=Ending Basis

An S corp shareholder can deduct personal share of
prorata loss
Loss Limitation= Basis+ Direct Shareholder loans- Distributions

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15
Q

Taxability of distributions to shareholders

A

Situation 1: S Corp with No C Corp E&P

a. Return to extent of basis-reduces basis- return of capital
b. In excess of basis- taxed as long term capital gain

Situation 2: S Corp with C Corp E&P

a. To the extent of AAA- taxed as dividend, reduces basis- old C Corp taxable dividend
b. To the extent of C Corp E&P- taxed as a dividend, does not reduce basis- old c Corp taxable dividend
c. Return to extent of basis- return of capital
d. . In excess of basis- taxed as long term capital gain

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16
Q

rule to remember for S Corp E&P

A

any amount rec’d in excess of basis is capital gain

17
Q

Terminating the Election

When does the S Corp election termiante?

A

Following scenarios-
a. Holders of majority stock consent
b. Corp fail eligibility tests- 100 USA People common,
i.e. Corp Owner, Foreign Owner
c.More than 25% of corp gross receipts from passive investmetn for 3 consecutive years
3 Strikes you are out

18
Q

Re-electing S Corp status

A

-if S Corp status revoked
-a new election cannot be made for 5 yrs
unless IRS consents
- If termination occurs in mid yr
- 2 short yrs, S Corp and C Corp
-Earnings are prorated on a daily basis
-