R5 Flashcards
Where do capital losses and other items of income and loss go?
they flow through to the tax returns of the shareholders
Who would not be eligible to be a shareholder in an S Corp?
LLCs with more than one owner (aka partnerships)
T/F: An S Corp can only have one class of stock outstanding.
true - ex. they can’t have both common and preferred stock
Who would be considered eligible S Corp shareholders?
individuals, estates, grantor trust created by a U.S. citizen
A corporation can be treated as an S Corp if it has _____ or fewer stockholders.
100
When would an S Corp have to pay a built-in gains tax (fair market value - adjusted basis)?
when it disposes of assets that were appreciated in value at the time the Company converted from a C to an S Corp
note: the S Corp would not have a built-in gain if they were an S Corp from incorporation
T/F: In order for an S Corp election to be valid, it must be agreed upon in writing by ALL shareholders.
true
How would you calculate the tax liability as a result of a sale?
(FMV - adjusted basis) x 21%
When does an S Corp election become effective?
to be retroactively effective for the current taxable year (as of Jan. 1), the S Corp election needs to be made by the 15th day of the third month (March 15)
if the election is made after that date, it becomes effective on the first day of the next taxable year (Jan. 1)
Reminder: charitable contributions are limited to 10% of taxable income before charitable contributions
noted
Would long-term capital losses and charitable contributions be included in taxable income?
no
T/F: Dividend income is included in net business income.
false - it’s not (it’s a separately stated item)
What would be included as separately stated items on Schedule K-1?
-long-term capital losses
-charitable contributions
-interest income (NOT expense)
-dividend income
-Section 179 expense
T/F: The value of fringe benefits such as health insurance is includable in the gross income of S Corporation shareholders who own more than 2% of the S Corp’s stock.
true
T/F: Both tax-exempt and taxable interest income increase a shareholder’s basis in S Corp stock.
true
Reminder: the bank loans won’t affect the tax basis but loans provided by the corporation will affect the tax basis; loans from corporations will also need to be reduced by any amount that was repaid
noted
What’s an example of how you would calculate the ending tax basis when given the beginning tax basis with various transactions?
beg. tax basis
+ ordinary income (the shareholder’s share from the corporation)
(OR subtract ordinary loss)
+ capital gains
+ additional contributions (for property, initial investment in the corporation, etc.)
- distributions received from the corporation
- capital contributions
- net operating loss incurred by the corporation
= ending tax basis
*note: wages are NOT included here
Where is tax-exempt income reported?
Schedule K-1
T/F: The “at-risk” rules applicable to losses limit the amount of loss that can be flowed through from the S Corp to the shareholder to the amount the shareholder is “at-risk” (shareholder’s risk of financial loss).
true
What is the accumulated adjustments account (AAA) and what would increase/decrease it?
it’s the accumulated earnings and profits for the S Corp
it’s increased by ordinary income and separately stated income and gains (such as taxable interest income, interest, and dividends)
it’s decreased by ordinary business losses, separately stated losses and deductions, nondeductible expenses, and distributions
note: tax-exempt income would be on an other adjustments account (OAA)
note: the AAA gets subtracted from the corporate distribution and the stock basis
T/F: If distributions are made in excess of the shareholder’s basis (after considering all potential activity such as ordinary income), the excess amount is taxed as a capital gain.
true
T/F: If an S Corp acquires 100% of the stock of an active C Corp, this will NOT terminate the election as an S Corp.
true
T/F: If an S Corp was terminated during the year, you should prorate the income to be allocated to the S Corp for the part of the year where it was still an S Corp.
true
What would cause an S Corp to terminate?
if the S Corp was a former C Corp, has undistributed earnings and profits, and has passive investment income exceeding 25% of gross receipts in each consecutive year
T/F: An S Corp status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent (across both voting and non-voting stock).
true
T/F: An S Corp that terminates cannot reelect S status until the fifth year from the current year.
true
T/F: There is no gain or loss recognized for partnerships when a partner contributes property to a partnership in exchange for a partnership interest (stock invested into the partnership).
true
How would you calculate a gain (ordinary income) for partnership contributions?
FMV of property x % interest in capital
- adj. basis; stock purchased at the beginning (to get into the partnership)
= gain realized
*if this is positive, no gain is recognized
*it would be ordinary income b/c the partner provided services for the partnership interest
How would you determine a partner’s basis in PARTNERSHIP INTEREST when a liability is assumed by the partnership?
cash basis of cash contributed (if any)
+ basis of property contributed (not FMV)
+ their share of taxable income
- cash received
- liability assumed by the OTHER PARTNERS (total liability x total % of ownership for other partners)
+ FMV of services rendered
+ recourse liabilities assumed based on their % of ownership
= partnership basis
T/F: As long as the liability (per above) does NOT exceed the basis of the property contributed (there’s a positive amount leftover), the contributing partner will not have to recognize a gain at the time of contribution.
true
T/F: If a partner acquired services (as opposed to property), this full amount would be considered ordinary income.
true
