R5 S corp Flashcards
S corporation
1120-S -shareholders pays the tax (k-1) ........................... Formation - valid S corp election is filed by the C corp ( form 2553) ............................. Contribution - same as C copr rule Nontaxable if - contribution of property ( not services) - solely in exchange for stocks - own 80% of stock
Eligibility to be Scorp
when the election takes effect
- individuals, estate or trust can be share holders
- No nonresident alien
- no coproration or partnership
- 100 U.S people only ( shareholders)
- One class of stock - common stock only ( diff voting rights is okay)
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when the election takes effect :
by march 15 ( retroactive to beg. of year)
new shareholders: after the election is in effect, consent of new shareholders not required
effect of S corp election on C corp
- S corp tax year : GR: Dec 31st is required year-end
- no tax on c corp: each shareholders reports income and pays tax (k-1)
- Certain Corp level tax
1) LIFO recapture tax
2) Built-in-gains
- was c corp and elected to be S copr
- appreciated property on the election date ( FMV>basis)
Exemption from built-in gain IF:
- was never C corp
- sale or transfer does not occur within five years
- appreciation happened after S- election
- asset was acquired after S -election
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(3) Tax on passive investment income
21%
-has accumulated earnings and profit from prior years as C corp AND
- passive investment income exceeds 25% of the total gross receipts
Effect of S corp election on Shareholders
- pass through (k-1)
- per share, per day basis
- and losses are limited to the basis
Separately stated items
on a K-1 to each shareholder
- Shareholders is taxed when earned/reported
- not when distributed to them or received
1) rental real estate income or loss ( Schedule E)
2) interest income ( schedule B)
3) Dividend income ( Schedule B)
4) Royalties ( Schedule E)
5) net short term capital gain/loss (Schedule D)
6) net long term capital gain/loss (Schedule D)
7) net section 1231 gain or loss (Schedule D)
8) charitable contribution (Schedule A)
9) section 179 expense deduction
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section 199A QBI: 20% deduction of net income
Fringe Benefits
Deductible
- owns 2% or less
Non-deductible
- if owns over 2%
- included in that shareholder’s income and report on k-1
Shareholders basis in S Corporation Stock
BASE
B - Initial basis ( contribution: cash, adj. basis of property, FMV of services)
+ A: Income items ( ordinary business income, separately stated income/gain items, and tax-exempt income)
+ Additional contributions
- Distribution to shareholders
S: - loss/deduction items ( ordinary business loss, separately stated loss/deduction items, nondeductible expenses)
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E: ending balance
- S corporation nonrecourse debt does not increase shareholder (at-risk) basis
- do not include any S corporation debt
- loans from shareholders to S corp included in debt basis
Limitations on pass-through of losses
Deduct up to:
Basis OR
Direct loan
1) Tax basis limitation
2) At-risk limitation
3) Passive activity loss (PAL) limitation
4) excess business loss limitation
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1) Tax basis limitation
- loss to the extent of shareholders tax basis
- includes stock basis and basis in any direct loan
- loss in excess is suspended & CF indefinitely
- when sold: insufficient tax basis remaining when the shareholders dispose of his or her S corporation stock are LOST
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2) At-risk limitation
FURTHER limited by
- a shareholder’s at-risk amount may be lower
- nonrecourse loan
- a loss in excess of a shareholders at-risk basis is suspended
- when sold: shareholders disposes of his or her stock can be offset against any gain from selling the stock
Accumulated Adjustment Account (AAA)
- Prior S corp income which can be withdrawn tax-free (first)
Increase to AAA
- ordinary biz income
- separately stated income and gain items(other than tax-exempt income)
Decrease to AAA
- ordinary business loss
- separately stated loss and deductions
- nondeductible expenses
- distributions ( may not reduce AAA below zero)
Other Adjustment account
- perm differences:
tax-exempt interest on municipal bonds and related expenses
tax-exempt life insurance proceeds
federal taxes paid or accused in S copr year that realte to C corp years
Distribution to shareholders
1) Always been a Scorp
1st- to the extent of stock basis - NOT taxable, reduce the basis in the stock
2nd- in excess of stock basis : taxed as long-term capital gain
2) S corp with C corp E&P
1st - to extent of S copr AAA: not sbjuet to tax, reduce basis in stock
2nd - to the extent of C corp E&P: taxed as dividend, does not reduce the stock basis
3rd- to the extent of stock basis - NOT taxable, reduce basis in stock
4th- in excess of stock basis : taxed as long-term capital gain
Termination of S copr
& Reselection of S staus
1) shareholder holding more than 50% stock ( voting n non voting) for a voluntary revocation
2) fails to meet any of qualification
- corp or partnership owner
- foreign owner
- more than 100 owners
( WILL be terminated immediately)
3) more than 25% gross receipt are from passive investment for 3 consecutive year ( only for C copr that became S corp)
Efective date of termination
- if before march 15 then for the year
- if after then for next year
- if disqualified immediately
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& Reselection of S staus
- wait 5 years
- Ask IRS permission
Liquidation of S corp
1) S corp effect
2) Share hodlers effect
1) S corp effect
FMV
- basis
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taxable gain/loss
report on K-1 for shareholders, increase their basis in stock
2) Share holders effect
Cash received FMV of property received (k-1) ( liability assumed) ----------------------------------- amount realized ( basis in stock) ------------------------------- The taxable gain(loss)
