REG 5 - S Corporations Flashcards
What are losses in an S corp limited to?
Losses in an S corp are limited to:
1) Basis + Direct loans
2) At-risk amount
What is the at-risk amount?
The at-risk amount is equal to the shareholder’s stock AND debt basis
Define nonrecourse loan? Is a nonrecourse loan considered in the at-risk amount?
A nonrecourse loan is a loan where the shareholder is NOT liabile.
- A nonrecourse is included in basis but not included in the at-risk amount.
What increases a taxpayer’s at-risk amount?
- contribution of cash or other property to the S corp
- loans to the shareholder
- allocable share of income undistributed
- recourse loans
What reduces a taxpayer’s at-risk amount?
- allocable share of losses
- distributions of cash or other property
How long are losses carried forward in an S corporation?
Losses are carried forward indefinitely
Is a shareholder in an S corp tax when income is earned or when income is distributed?
A shareholder in an S corp is taxed when income is earned, NOT when distributed or received.
What are fringe benefits? What are deductible fringe benefits? What are nondeductible fringe benefits?
Fringe benefits - an extra benefit (supplementary employee’s salary) - a company car, health insurance.
Deductible fringe benefits
- Deductible for non-shareholder employees and shareholders owning 2% or less the corporation
Nondeductible fringe benefits
- Nondeductible for the shareholders owning over 2% in the S corporation
What is the calculation of shareholder basis in S corp?
B - Initial basis A - + Income items (separately and non-separately stated items) S - -Distributions to shareholders S - Loss or expense items E = Ending basis
- S corp debt does NOT increase a shareholder’s basis. (like a partnership)
Define the tax result and treatment of the following when there is NO C corporation E&P:
1) Distributions to the extent of basis in stock
2) In excess of basis of stock
1) Taxpayer does not get taxed on distributions if it is up to the stock basis, BUT it reduces basis. (RETURN OF CAPITAL)
2) Taxpayer gets taxed on distributions if it is higher than stock basis (CAPITAL GAIN DISTRIBUTION)
Define the tax result and treatment of the following when THERE IS C corporation E&P:
AAA = The total amount of accumulated S corporation income or loss
1) Taxpayer does not get taxed on distributions if it is up to the extent of AAA (S corporation profits)
2) Taxpayer treats the previous years C corp E&P as C corporation taxable dividend
3) Taxpayer does not get taxed on distributions if it is up to the stock basis, BUT it reduces basis. (RETURN OF CAPITAL)
4) Taxpayer gets taxed on distributions if it is higher than stock basis (CAPITAL GAIN DISTRIBUTION)
E.g. New Elect Corp was an S corp starting Jan 1, Year 2. They had accumulated E&P from C corp of $20,000 for Year 1. For years 2 through 8 they had $100,000 of income and distributions of $60,000 (AAA = $40,000). Year 9 there is ordinary income of $40,000 and distributions of $110,000.
1) The tax free portion is $80,000 (40,000 from AAA and 40,000 from current year income)
2) The corporation taxable dividend is $20,000 (previous year’s C corp E&P)
3) The excess $10,000 is a capital gain.
How will an S corporation status terminate?
1) Voluntary revocation
2) S corp fails to meet any or all of the eligibility requirements (e.g. corporation stockholder or foreign owner)
3) If S corp has C corporation earnings and profits AND has more than 25% of income from passive investment income from gross receipts for THREE YEARS.
How can a corporation with terminated or revoked S corp status re-elect S corp status?
1) Wait 5 years
OR
2) Ask IRS permission
What is the taxable gain/loss for an S corp during liquidation?
FMV
- Basis in assets
= Taxable gain/loss
- Taxable gain/loss is reported on shareholder’s K-1 and gain increases shareholder’s basis
What is the taxable gain/loss for the shareholder in S corp during liquidation?
Cash \+ FMV of property - Liabilities S corp assumed - Stock basis (+ taxable gain/loss from S corp liquidation) = Taxable gain/loss
