R5-M1 S Corporations Flashcards
1
Q
what are characteristics of a S corporation?
A
- No more than 100 U.S shareholders. Can be individuals, estates, and certain trusts
- can only have 1 class of stock outstanding (CS) . Different voting rights are allowed
- Corporations and Partnerships are NOT eligible shareholders
2
Q
what are the exceptions that S corp pays tax?
A
- Built-in gain (FMV - adjusted basis): was a C corp and with appreciated assets that are disposed within 5 years after the S selection. Tax rate is the highest corp income tax rate 21%
- passive investment income: S corp has accumulated E&P from prior years as a C corp and have passive investment income (royalties, dividends, interests, rents, and annuities) exceeds 25% of total gross receipts
- LIFO recapture tax
3
Q
what affects shareholders’ basis?
A
- tax-exempt interest income => increase basis
- non-deductible expenses => decreases basis
4
Q
what are rules for fringe benefits for S corp?
A
- Fringe benefits such as health insurance premium are deductible by an S corp if:
+ non-shareholder employees and
+ employee shareholders owning 2% or less of the S corp - If an employee shareholder owns > 2% of the S corp, the only way the S corp can deduct the cost of fringe benefits is if the corp includes the benefits in the employee shareholder’s W-2 income.
5
Q
what are characteristics of accumulated adjustments accounts (AAA)?
A
- AAA is the accumulated E&P during the years. Cannot reduce below zero. However, AAA may be negative due to S corp losses and deductions
- Increases AAA:
+ ordinary business income
+ separately stated income and gain items (other than tax-exempt income) - Decrease AAA:
+ ordinary business loss
+ separately stated losses and deductions
+ nondeductible expenses (other than expenses related to tax-exempt expense)
+ distributions (may not reduce AAA below zero)
6
Q
what are characteristics of other adjustments account (OAA)?
A
- designed to keep a cumulative record of items that affect S corp shareholder’ basis but do not affect AAA
- tax-exempt interest on municipal bonds and related expenses (federal tax)
- tax-exempt life insurance proceeds and related nondeductible premiums
- federal taxes paid or accrued in a S corp year that relate to C corp years
- Do not impact the taxability of S corp distributions
7
Q
what are the terminating events of an S corp?
A
- shareholders holding more than 50% of the stock consent to a voluntary revocation
- fails to meet any of the S corp qualifications
- have more than 25% of passive investment income in the S corp’s gross receipts for 3 consecutive years (only if the corp has prior C corp E&P)
*note: wait 5 years to reelect S status from the terminated year
8
Q
what is the effective date of an S corp?
A
- S corp election must be made by the 3/15 of the taxable year, and it is retroactively effective on the first day of that year
- If the election is made after the date, it becomes effective on the first day of the next taxable year
9
Q
what can a shareholder deduct of the loss on the shareholder’s tax return?
A
can deduct equal to the taxpayer’s stock basis and debt basis in the S corp
10
Q
what are limitations on pass-through of losses?
A
- for an S corp shareholder to deduct a loss (deduct up tp basis + shareholder’s direct loans to the S corp), the shareholder must clear 4 hurdles in this order:
- Tax basis limitation: shareholder’s tax basis + direct loan from shareholder to S corp. Excess loss is suspended until tax basis reinstate (debt first then stock basis) and carry forward indefinitely until disposed with a loss
- At-risk limitation: same as tax basis above but further limit. at risk amount may be lower than his or her stock and debt basis if the taxpayer takes out a NONRECOURSE LOAN to loan to the S corp. insufficient at risk basis can be used to offset against any gain from selling the stock
- Passive activity loss (PAL) limitation:
- Excess business loss limitation
