Reg Sec 3

Question 1

• In order to be an S corp (Simple and Small)

- Formation

Answer 1

-S corp No more than 100 Shareholders
All shareholders must be individuals or estates or trust for individuals.
No corporations, partnerships or big trust as shareholders.
Husband and wife count as one.
resident or citizen of the US
there can only be one class of stock(no preferred stock)

• formation is similar to C corp, Cash or property (80%) is not taxable and services is taxable to FV of stock.
• Election to become a S corp must be mad by 15th day of 3rd month of the tax year, any election afterwards will be effective the fellowing year.

Question 2

Operation of S corp

Charitable contributions

Answer 2

Initial Basis+ Ordinary Business Income- Losses+ Muni bond interest+ separately stated items(income competed on an Average daily basis)- distribution received.

S corp can’t take a deduction for charitable contributions.

Question 3

Separately stated items

Answer 3

Any item that can hit a limit on you individual tax return
Capital gains/losses, section 1231 gains/losses, section 189 depreciation deduction, rent and royalty income, charitable contributions, and interest income on investments.
Allocation of Income Average daily basis Example:
100 shares outstanding reported 365,000 of income for 20x1. one shareholder purchased 5 shares on 11/30/x1 and held through the year end. 365,000/365 days = 1,000 per day. With 100 shares outstanding this come to 1,000/100 shares=10 per share per day. Making the purchase on 11/30/x1 to year end makes in 31 days for 10 x 5 shares x 31 days = 1,550.

Question 4

S Status Terminatin

Loss on shareholders individual Tax return

Answer 4

termination of an S corporation only requires shareholders holding a majority of the shares (including non-voting shares) once S corp status has been revoked, it cannot reelect such status for 5 years. If passive investment income exceeding 25% of its gross receipts for three consecutive years and have accumulated earning and profits takes C corp status

A shareholder my deduct losses to the extent that the shareholder is at risk

Question 5

Buit-in Gains Tax(BIG)

Answer 5

Applies if a C corp elects S corp status and the FMV of its assets exceeds their bases. If assets are sold within 5 years, a special built-in gains tax of 35% applies. if FMV is less than basis, this would not apply

Question 6

1. Accumulated Adj Account (AAA) S Corp
2. Accumulated Earings and Profits (AEP) C Corp
3. Basis
4. Capital gain

Answer 6

1. AAA represent the cumulative balance of undistributed net income and deduction for S Corp. Not taxable when distributed since income is taxed when gained.
2. Represent earnings and profits that where never taxed and are taxed when distributed
3. Basics isn’t taxable. This is what you put in stock
4. The capital gain

Question 7

Decrease in basis S corp

Decrease or Inc Basis

Answer 7

Normally cash distribution are non-taxable to the extent of a shareholder’s basis. if 8,000 in cash is distributed with a 10,000 basis the the basis will decrease to 2,000(10,000-8,000). Since the any % of the liability.

Increase for Inome items and Gains, Decreased for distributions; decreased for non-deductible, non-capital expenses and depletion, decreased for items of loss and deduction.