REG 5 - S Corps, Partnerships, etc Flashcards
S-Corp election due dates
March 15. When making original election to become an S Corp, if done by March 15th the year in consideration counts, if after it begins Jan 1 of the following year
S Corp property contribution rules
Same as C Corp. Nontaxable if:
1) a contribution of property (not services)
2) solely in exchange for stock
3) after the transfer, the shareholder (or group of shareholders) has control of the corporation through 80% stock ownership
S Corp Eligibility rules
1) Must be in the US or citizen of US
2) No more than 100 shareholders
3) One class of common stock only
4) Corporations or partnerships may NOT be shareholders
S Corp tax year
Dec 31 is required year end
S Corp paying tax exceptions
1) LIFO Recapture tax
2) Built-in gains tax
3) Tax on passive investment income
Built-in gain tax occurs when
A distrbution or sale of an S Corps assets and:
1) A C Corp elects S Corp status and
2) the FMV of the assets exceeds the adjusted basis (Appreciated assets)
Exemptions to the built-in gain tax
- S corp was never a C corp
- the sale or transfer does not occur within 5 years of the first day the S election is effective
- The appreciation of assets being sold occurred after the S election
- Assets were acquired after the S election
- The unrealized built-in gain has been completely recognized in prior tax years
Calculation of built-in gain tax
21% of the lesser of:
1) Recognized built in gain for the current year or
2) The taxable income of the S corp if it were a C corp
Tax on passive investment income occurs when
1) The S corp has accumulated C corp earnings and profits and
2) Passive investment income exceeds 25% of total gross receipts
[Hoarding dividends and passively investing them]
Separately stated S corp items not included in ordinary business income
- Rental real estate income or loss
- Interest & Dividend income
- Royalties
- Net short & long term capital gains/losses
- Charitable contributions
Deductible Fringe benefits
Fringe benefits for non-shareholder employees or shareholders owning 2% or less of the S corp are deductible by the S corp in calculating ordinary business income. Over 2% is included in that shareholders income and reported on K-1
S Corp taxation key points
1) Shareholders must include on their individual tax return their share of each “pass through” item
- Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year
Accumulated adjustments account (AAA)
Prior S corp income which can be withdrawn tax free. Acts a bit like retained earnings
Taxability of S corp distributions with NO C corp E&P
1st) to the extent of the stock basis, non taxable
2nd) in excess of the stock basis, taxed as long-term capital gain
Taxability of S corp distributions WITH C corp E&P
1st) to the extent of S corp AAA balnce, non taxable
2nd) to the extent of C corp E&P, taxed as dividend
3rd) to the extent of the stock basis, non taxable
4th) in excess of the stock basis, taxed as long-term capital gain
Terminating events of an S corp
1) Shareholders holding more than 50% of the stock consent to a voluntary revocation
2) The corporation fails to meet any of the eligibility rules
3) Excess passive investment income is more than 25% of the corporations gross receipts for 3 consecutive years (must have prior C corp E&P)
Short Tax years
S corp can specify an effective date in which the revocation occurs, or the corp can fail to meet a requirement. Either way, the corporation will be required to split the tax year into two and either allocate based on the relative number of days or close the books on the date of conversion
Reelecting S status
- Must wait 5 years or ask IRS for permission
Liquidation of an S corp: consequences to S corp
Recognized gain or loss on distribution of property as if it was sold at FMV
FMV of assets distributed
(Basis in assets)
=Taxable gain/loss
Liquidation of an S corp: consequences to shareholders
Cash received \+FMV of property received (Liabilities assumed) =Amount realized (Basis in stock) =Taxable gain/loss
*The shareholders stock basis is determined after all other activities for the year have been taken into account (share of income, etc). The portion of taxable gain/loss calculated from liquidation of S corp (previous flashcard) will be included in basis in stock calculation.
Types of partnership interest
1) Capital interest - a right to share in net assets when liquidation occurs
2) Profit interest - a right to share in future profits or losses of the partnership
Profits interest acquired for services provided
Will not have to recognize income at the time of exchange
Capital interest acquired for services provided
The liquidation value of the capital interest is included in the partner’s taxable ordinary income.
*Taxable so FMV.
Allocation of partnership debt to partners: recourse debt
Only general partners share
Allocation of partnership debt to partners: nonrecourse debt
General & limited partners share based on profit sharing ratio
Holding period of partnership interest
Use “old” contributed property holding period for PP&E
**Exception, use the date the property was contributed for inventory
Allocation of built-in gain or loss on contributed property in a partnership
The built in gain or loss calculated at the time of contribution is fully allocated to the contributing partner at the time of sale. If there is additional gain or loss post-contribution, it is allocated among all partners
Partnership’s Basis in contributed property (inside basis)
Greater of NBV and debt assumed
Partners tax basis in partnership interest
Beg Capital account
+% of all income
(% of all losses and deductions)
(distributions)
=Ending capital account
+%partnership liabilities recourse and nonrecourse
=Ending tax basis in partnership interest
**your share of liabilities in a partnership increase your basis, while S corp nonrecourse liabilities do not increase shareholder basis
Timing of taxable income to the partner
Treat like a bank account
Income - Taxable and increases basis
Withdrawal - Nontaxable and decreases basis
Guaranteed payments to partners
Partner - taxable income on K-1
Partnership - expense which is deductible to the partnership
*Does not change basis
Partnership debt included in partners tax basis and at risk basis
Recourse debt:
Tax basis - Yes (if general partner or personal guarantee)
At risk basis - Yes (if general partner or personal guarantee)
Qualified nonrecourse financing:
Tax basis - Yes
At risk basis - Yes
Other nonrecourse debt:
Tax basis - Yes
At risk basis - NO
Nonliquidating distributions to a partner
Nontaxable, treated like a bank account withdrawal. Cash and NBV of property reduces basis
When basis in partnership interest is less than distributions:
1) If its just property distributed
- reduce partnership interest basis to 0 (can’t go below), the partners basis in the property is amount just used to get to 0
2) If its just cash distributed
- Excess cash is a capital gain
3) If both cash and property
- Cash is used up first, then property
4) If cash and multiple assets
- Cash, hot assets, then rest of property
Hot assets
Inventory, unrealized receivables for cash basis taxpayers
When does loss get recognized in a complete withdrawal from a partnership
When ONLY cash is received and that cash is less than your adjusted basis or multiple hot assets have a greater partner basis vs partnership basis (R5-40)
Partners basis in partnership interest is LESS than partnerships basis in assets distributed (liquidating)
Step 1: Assign the basis to the assets that the partnership has
Step 2: Write down property in the last category (other property, or hot assets if no other property) if their FMV is below their NBV
Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2
(R5-41)
Partners basis in partnership interest is MORE than partnerships basis in assets distributed (liquidating)
Step 1: Assign the basis to the assets that the partnership has
Step 2: Write up property in the last category (other property, or hot assets if no other property) if their FMV is above their NBV
Step 3: Allocate any basis remaining to the last property category based on relative adjusted basis of the assets after step 2
Sale of partnership interest
Capital gain or loss
- Exception: the partners share of hot assets is considered ordinary income
- *Must allocate income or loss based on number of days old and new partners were in
