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- Shareholders are taxed on these items, regardless of whether or not the items have been distributed (withdrawn) to them during the year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