Reg 5D S Corporation Taxes Flashcards
S Corp
Domestic corporation that avoids double taxation. Flow through entities , subject to a single level of corp. Income is passed through the shareholders who reports income on their individual returns.
S corporation requirements
- Must be a domestic corporation
- No more than 100 SH; All members of a family and their estates may be treated as on shareholder for this test
- only one class of stock ( voting and non voting) common is acceptable but no preferred stock
Limitations on who can own S Corp stock
- Individuals citizens, residents estates, certain exemp orgs, or certain trusts
Cannot hold stock in S corporations
- Partnerships
- Corps
- Non resident aliens
Entities denied from being an S corp
- Bank thrift instituions
- Insurance companies
Permitted tax year
- usually a calendar year
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S corp
- An S corp can have a C Corporation or an S corp subsidiary
S Corporation election
- You need to make an affirmative election and must satisfy all tests
- Each Shareholder who owns stock at the time consents to the election
- Can make an election retroactively
Termination and re-election
- Election can be revoked only with the consent of shareholders who hold more than 50% of the number of issued and outstanding shares of stock at the time of revocation.
- Once terminated you can make another s election for another 5 years
- If you fail any eligibility tests your S election will terminate immeiately
Termination
The corp for each of the three consective tax years has :
- Accumulated earnings and profit
- Derives more than 25% of its gross receipts from passive investment income
Shareholder schedule K-1
- Allocates to share holders on per share per day basis
- Each shareholder includes in his taxable income his pro rata share of each item of income, loss, deduction, or credit that is separately stated by the S Corp, regardiless of whether the distribution is made to the sH
S Corp losses ( take note of this)
- SH loss is limited to the shareholders stock basis in the corp
- Losses that are disallowed can be carried forward indefinitely
- The adjusted basis of a SH in an S crop is increased by any loans made by the SH to the corporation
Possible taxes at S corporation level
- If an S corp was previously a C corp
- if an S corp has accum e&P from C c corp year of its tax year, hass passive income in excess of 25% if gross receipts and has taxable income at year end, the corp may pay tax on the excess net passive income
Possible taxes at S corporation level
LIFO Recapture
Shareholders basis of stock
- Basis increased by all income ( including tax exempt) and the excess of depletion
- Decrease basis by property distributions ( excluding dividend istribtuin)
- Decrease basis by non deductible expenses
- basis is decreased by all deductible losses and deductions
Distributions to SH
- To the extent that the balance of the distributions is less than the basis of the stock, the shareholder has no gain or loss
- To the extent that the distribution exceeds the basis, that’s usually a capital gain