REG 5 - S Corporations Flashcards
What are the three types of tax-free property contributions to a S corp that are treated as tax-free? (Like C corp)
1) A contribution of property (NBV)
2) Solely in exchange for stock (no boot); AND
3) After the transfer, the shareholder (or group) of shareholders control 80% stock ownership
- Services contributed are taxable at FMV
Define the criteria to be an eligible shareholder in a S corp?
- Must be a USA individual, estate, or certain types of trusts
- Individual may NOT be a nonresident alien
- Neither corporations NOR partnerships are eligible shareholders
What is the limit to the amount of shareholders an S corp may have? What type of stock is allowed?
- An S corp can only have up to 100 shareholders (husband and wife is counted as one). Only class of stock applicable is common stock.
What is the criteria for electing S corporation status?
- All shareholders must consent to valid election with Form 2553.
- Election must be taken by March 15th of the next year for current year’s calendar year (e.g. you can be an S corp if you do election by March 15 of next year
Is there consent needed to admit a new shareholder?
The consent of a new shareholder is not required.
What is the the general rule for calendar year of S corp? When is the due date?
The general rule is that December 31 is the required year-end.
Due date of return is March 15
Does an S corp pay tax? What are the three exemptions?
An S corp does not pay tax.
1) LIFO recapture tax
2) Built-in gains tax
3) Tax on passive investment income
Define built-in gains tax?
- Tax on S corp if both the two conditions occur:
1) A C corporation in prior years elects S corporation status
2) FMV > Basis
What are the exemptions to not paying built-in gains tax?
Exemptions from recognition of gain (no built-in gain tax) if any ONE occurs
1) The S corporation was NEVER a C corporation
2) The sale or transfer does NOT occur within 10 years of the first day that the S election was made.
3) The S corporation can demonstrate that appreciation (FMV > Basis) occurred after the S election
What is the calculation of S corporation tax?
Multiplying 35% (the highest corporate tax rate) by the lesser of:
1) Recognized built-in gain for the current year
OR
2) The taxable income of the S corporation if it were a C corporation
Define the tax on passive investment income?
- S corporation is taxed at 35% (highest corporate rate) on net income or excessive passive investment income if the following TWO tests are met:
1) S corporation has accumulated C corp earnings and profits from prior years
AND
2) Passive income exceeds 25% of gross receipts
How are allocations of gains to shareholder made?
Per-share, per-day basis