R3 S Corporations

Question 0

Describe two requirements for election S corporation status.

Answer 0

• All shareholders must agree
• Election must be made either immediately preceding the year for which election will be effective or on or before March 15 on the election year then election is retroactive to the beginning of the year

Question 1

What are the eligibility requirements for an S corporation election?

Answer 1

• Domestic corporation
• One class of stock (different voting rights are allowed)
• Eligible shareholders must be individuals, estates, trusts (not corporations or partnerships)
• No nonresident aliens shareholder
• No more than 100 shareholders

Question 2

How are S corporation status terminated?

Answer 2

• Majority shareholders consent to voluntary terminate more than 50%
• Do not meet one of the requirements
• More than 25% of the corporation’s gross receipts come from passive activities for 2 consecutive years and the corporation had C corporation earnings and profits at the end of each year

Question 3

What tax year must an S corporation adopt?

Answer 3

Must adopt calendar year unless a valid business purpose for a different tax year (fiscal year) is established

Question 4

When does an unrealized built in gain result ?

Answer 4

Results when a C corporation elects S corporation and the FMV of corporate assets exceeds adjusted basis of the corporate assets at the election date

Question 5

When is an S corporation exempt from a tax on built in gains?

Answer 5

• The sale or transfer does not occur within 10 years of the first day of the first year the S Corporation election is made
• S Corporation was never a C Corporation
• S Corporation can demonstrate that the distributed asset was acquired after the S election
• S Corporation can demonstrate that the appreciation occurred after the S election
• The net unrealized built in gain has been completely recognized in prior tax years

Question 6

How is the tax on built in gains calculated?

Answer 6

Built in gains are taxed at 35% times the lesser of:

• Net recognized built in gains for current year
• Taxable income of S corporation as if the corporation were a C corporation

Question 7

What items must be separately listed on an S corporation tax return (schedule K-1)?

Answer 7

• Ordinary income
• Rental income/loss
• Portfolio income (including dividend, interest, royalties, and all capital gains/losses)
• Section 1231 gains and losses
• Charitable contributions
• Section 179 deduction
• Depreciation
• Foreign taxes
• Tax exempt interest

Question 8

How do you calculate the shareholders basis in S corporations?

Answer 8

Initial basis (same as c corporation)
\+ income times including tax exempt
\+ additional investment in stock
- distribution to shareholders
- loss or expense items
= ending basis

Loss limitation = basis + direct shareholder loan to corp - distributions