R3.2 – S Corporation Flashcards
Forms
Form 1120S – S Corporation Income Tax Return
Schedule K-1 (Form 1120S) – S Corporation’s Share of Income, Deductions, Credits
Eligibility
Qualified Corporation
– Domestic corporation
– Can’t file consolidated tax returns with a C corporation, even if it owns 100% C corporation
Eligible shareholders – Individuals: Citizens and permanent residents – Estates – Grantor and voting trusts – Qualified retirement plans – 501(c)(3) charitable organizations
Ineligible shareholders
– Aliens
– C corporations
– Partnerships
≤ 100 shareholders
Only one class of stock – only common stock – Some differences in the voting rights of the stock permitted – Convertible debt okay until and unless converted into second class of stock
Election
Unanimous consent of corporation’s shareholders needed to obtain S status
Once election made, it can only be terminated it majored your shareholders go to revoke S status
Election valid for current tax year is made by 15th day of 3rd month of tax year (March 15 for calendar year corporation)
After election made, the consent of the new shareholder is not required
S corporation status continues unless majority vote to end it
Effect of S Corporation election on Corporation – Tax Year
Must file Form 1120S
Must adopt calendar year unless a valid business purpose for different tax year is established
Tax return due the 15th day of the 3rd month (March 15th) after the close of the tax year
Effect of S Corporation on Corporation –Passthrough to Shareholders
Generally, no tax at entity level
Earnings passthrough to shareholder where it is packed
Exceptions: Entity level taxes on S corporations
- LIFO recapture
- Built in gains (unrealized built-in gains)
- Tax on passive investment income
Effect of S Corporation on Corporation – Passthrough to Shareholders: LIFO Recapture
C corporations that elect S status must include in taxable income for the last C corporation year the excess of inventory computed under FIFO over LIFO
Effect of S Corporation on Corporation – Passthrough to Shareholders: Built in gains (unrealized built-in gains)
Built in gains = When an S corporation used to be a C corporation and, upon conversation to an S corporation, the FMV of the corporate assets exceeds the adjusted basis.
Sale of assets with built-in-gains within 1- years = gain taxed at corporate level
Exceptions
– S Corporation was never C Corporation
– Sale after 10 years from S election year
– Appreciation occurred after S election
– Asset acquired after election
– Built in gain completely recognized in prior tax year
Tax = 35% of the lesser of
1) Recognized built-in gain for the current year
or
2) Taxable income of S corporation if it were a C Corporation
Effect of S Corporation on Corporation - Passthrough to Shareholders: Tax on Passive Investment Income
Tax applies when
1) S corporation has accumulated corporation E&P
and
2) Passive investment income (dividends, interest, etc.) > 25% of gross receipts
Tax = 35% of the laser of:
1) 35% tax on lesser of:
net income,
or
2) excess passive investment income
Effect of S Corporation on Corporation – Passthrough to Shareholders: Separately and Non-separately stated items
S corporations (like partnerships)report separately and non-separately stated items
Non-separately = ordinary income
Separately state include capital gain/losses, interest, rental income, etc.
Effect of S Corporation on Shareholders – Pass-through of income/losses to shareholder
Separately stated items of business income or loss (ordinary income, rental income, dividends, interest, capital gains and losses, section 1231 games and losses)
Separately stated deductions (charitable contributions, Section 179 expenses)
Allocations to shareholders are made on a per-share, per-day basis
Effect of S Corporation on Shareholders – Pass-through of income/losses to shareholder: Loss Limitations
Losses are deductible subject to following limitation:
Loss limitation
= Shareholder’s adjusted basis
+ Direct shareholder loans
– Distributions
Effect of S Corporation on Shareholders – Shareholder Basis
Initial Basis
+ Income (separately, non separately stated, even nontaxable items)
+ Additional shareholder investments in corporation stock
– Distributions to shareholders
– Losses or expense items (even nondeductible)
= Ending Basis
Effect of S Corporation on Shareholders – Taxability of distributions to shareholders
S Corp without Corporate E&P
– Up to basis in stock = return of capital = not taxed, reduces basis in stock
– Beyond basis in stock = capital gains distribution = taxed as LT capital gain
S Corp with Corporate E&P
– Up to AAA = already taxed S Corp profit = not taxed, reduces basis in stock
– Up to see C Corp E&P = Old C corp dividend = taxed as dividend, does not reduce basis in stock
– Up to basis in stock = return of capital = not taxed, reduces basis in stock
– Beyond basis in stock = capital gains distribution = taxed as LT capital gain
Effect of S Corporation on Shareholders – Termination
By majority vote
By violation of an eligibility requirement
By violation on passive investment income limit (> 25% corporation’s gross receipts) for three consecutive years
Once terminated, S status can’t be elected without IRS permission for five years
