R3- S Corp/ Small Business Corp Flashcards
What are the requirements to qualify as S Corp?
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
When does the election of S Corp takes place?
- By March 15, retroactive effect beginning of the yr
- All shareholders must consent
- New Shareholders- consent not required after election is made
What is the S Corp tax yr?
General Rule: 12/31 Req’d
Unless valid business reason is established
Return date: March 15, if 12/31 YE
What are the tax consequences for S Corp?
No Tax on Corp
All earning pass through to shareholders
Certain exceptions apply
What are the types of taxes applicable to S Corp?
- LIFO Recapture tax
2. Built-in Gains tax
What is LIFO Recapture Tax?
- 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
What is built in gains tax? When does it occur?
Built-in Gains Tax occurs
- C Corp elects S Corp status
- The FMV of the assets exceeds the adjusted basis of assets on election date
When do you get an exemption for Built-in Gains Tax?
An S Corp is exempt if
- S Corp was never a C Corp
- Sale of Transfer does not occur within 10 yrs of S Corp election
- S Corp can demonstrate the appreciated occured after S Corp Election
- If Assets were acquired after S Corp election
- Net unrealized built-in gain tax has been recognized in prior tax yr
How to do you calculate Built in Gains Tax?
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
When is there a tax on passive investment income for S Corp?
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
What is the effect of S Corp election on shareholders?
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
What are the fringe benefits?
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
What is AAA Accumulated Adjustments Account ?
Treat like bank account
AAA is zero on S Corp election
Increase - for gain or profits
Decrease- for distributions, not below zero
Computing shareholders basis is S Corp Stock?
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
Taxability of distributions to shareholders
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