R5 - S Corps Flashcards
What are some commonly separately state items (not included in ordinary income)
Rental real estate income or loss
Interest Income
Dividend Income
Royalties
Charitable contributions
Section 179
Net short/long term capital G/L
Net section 1231 G/L
Can a shareholder in an S Corp be an employee and receive a salary?
Yes, that salary won’t be separately stated
Does tax-exempt interest increase shareholder basis?
Yes
Note: taxable interest income increases basis as well
For which entity is the owner’s basis increased/decreased by the owners share of P/L and NOT affected by the entity’s bank loan increases and decreases?
S Corporation
Deductible fringe benefits
For non-shareholder employees and those employees owning 2% or less of the S Corporation are deductible by the S Corp in calculating ordinary income
Nondeductible Fringe benefits
Cost of fringe benefits for shareholders owning over 2% is not deductible by the S Corp unless included in the employee/shareholders W2 income
Note: must include in shareholders income and report in K1
What is the calculation for a shareholders basis in an S Corp (order matters!!)
Initial basis (contribution of cash, adjusted basis of property, fmv or services)
+ income items
+ additional contributions
- distributions to shareholders
- loss/deduction items
Note: Include all separately stated and tax free items
Note: S Corp non recourse debt does NOT increase shareholder (at risk) basis
For a S Corp shareholder to deduct a loss, the shareholder must clear what four hurdles
Tax basis limitation
At risk limitation
PAL limitation
Excess business loss limitation
A suspended loss due to insufficient tax basis can be
carried forward indefinitely
Note: suspended losses remaining when the shareholder disposes of his or her S Corp stock are LOST
What is debt basis
Any direct shareholder loans made to the S Corp
What is Tax Basis
Stock Basis + Debt Basis
At risk basis
does not include non recourse loans where the shareholder is not personally liable
Which basis is reinstated first?
Debt basis then stock basis
Which limitations of pass through losses are applied at which level?
The tax basis and at risk limitations are applied at the entity level.
The PAL and excess business loss limitation are applied at the individual tax levek
Accumulated Adjustments Account (AAA)
the accumulated earnings and profits during the years the corporation is an S Corporation
Note: distributions may not reduce AAA below zero. however AAA may be negative due to S Corp losses and deductions
Increases to AAA
ordinary business income
separately stated income and gain items (other than tax exempt income)
Decreases to AAA
ordinary business losses
separately stated losses and deductions
nondeductible expenses (other than expenses related to tax exempt income)
distributions (may not reduce AAA below zero)
Other Adjustments Account (OAA)
account that is designated to keep a cumulative record of items that affect S Corp shareholders stock basis but do not affect AAA
What is included in OAA account
tax exempt interest
tax exempt life insurance proceeds and related nondeductible premiums
federal taxes paid or accrued in an S Corp year that relate to C Corp years
Distributions to shareholders are generally
not taxable if the entity has always been an S Corp
Distributions (without C Corp E&P)
ROC to the extent of stock basis
Capital gain to the extent in excess of stock basis
Distributions (with C Corp E&P)
AAA - reduces basis in stock
Extent of C Corp E&P - dividend income
OAA - reduces basis in stock
Extent of stock basis - ROC
In excess of stock basis - capital gain
An S corp will terminate as a result of
shareholders holding more than 50% of stock (voting + nonvoting) consent to a voluntary revocation - terminate by 3/15
corp fails to meet any of the qualifications for S status (corp/pship owner, foreign owner, more than 100 owners) - immediate termination
excess passive investment income - more than 25% of the corps gross receipts are from passive investment income for 3 consecutive years (but only if the corporation has prior C Corp E&P) - terminate at beginning of 4th year
When can you re-elect S status after termination?
wait 5 years or ask ask IRS permission
Contributions to an S Corp are nontaxable if it is:
a contribution of property (not services, this is taxable)
solely in exchange for stock
after the transfer, the shareholder or group has control of the corporation through 80% stock ownership
Requirements to qualify as an S Corp
Qualified Corp (must be domestic)
Eligible shareholders (US individuals, estates, or certain types of trust, qualified retirement plans and 501c3 orgs, NO nonresident aliens - must be a citizen or resident)
Shareholder limit (no more than 100) - family members may elect to be frayed as one shareholder
One class of stock- differences in voting rights are allowed
LIFO recapture tax
C Corps that elect S status must include in taxable income for the last C Corp year the excess of inventory computed using the FIFO method over the inventory computed using the LIFO method (S Corp will pay a tax)
Built in Gains Tax results when
A C Corp elects S Corp status and the FMV of the corporate assets exceeds the adjusted basis of corporate assets on the election date (appreciated assets). When these assets are later disposed of, BIG tax may have to be paid
Exemptions from BIG recognition
The S Corp was never a C Corp
The sale or transfer does not occur within 5 years of the first day that the S election is effective
The appreciation occurred after S election
The asset was acquired after S election
Total unrealized BIG has been completely recognized in prior years
Calculation of Tax for S Corp
21% of the lesser of:
recognized BIG for the current year
taxable income of the S Corp if it were a C Corp
Tax on passive investment income
taxed (21%) on the lesser of net income or excess passive investment income if -
S Corp has C Corp E&P and passive investment income exceeds 25% of total gross receipts
A single member LLC is
a disregarded entity for federal income tax purposes and is therefore treated as an individual
Consequences to an S Corp as a result of a liquidation
FMV of assets distributed
- Basis in assets
Consequences to shareholders as a result of a liquidation
Cash received
+ FMV of property received
- liabilities assumed
= Amount realized
- Basis in stock
= Taxable G/L
What is the shareholders basis in any property distributed, FMV or adjusted basis?
FMV
