S-Corp

Question 1

Form 1120S

Answer 1

Similar to partnership in filing
- March 15
- transfer items to K & K-1
- passthrough entity
- not showing income earned and charitable contributions

S-Corp can have 1 Shareholder
Partnership must have 2

• must adjust assets to FMV to be distributed

Question 2

Formation

Answer 2

Make a timely election - file an S corp form 2553 within 75 days of incorporation (initially a c-corp - corporate tax, and tax on shareholder) all shareholders must consent to the election
– if you are late, you are c-corp for first year and s-corp for second year

Question 3

Basis

Answer 3

Increases
- investments into S corp
- all income earned whether taxable or non-taxable
- stockholder loans made to s-corp increase the stockholder basis

Decreases
- withdrawals
- distributions
- losses
- stockholder paid back for loan - reduce stockholder basis only

** More Cash Distributed than basis - taxable gain **

Always take Loss AFTER distribution
- any additional loss will be suspended until income in the future

Question 4

Eligibility

Answer 4

you can lose the s-corp status
- allowed max 100 shareholders
- members of same family is counted as 1 shareholder (estate and trusts can also included)
- only one class or stock (common stock): can have voting rights and non voting rights
- c-corp cannot be a shareholder

If lost, income is calculated as a per-share, per-day basis between S & C corp for the year

Question 5

Revocation of S-Corp Election

Answer 5

can be voluntarily - only requires majority
- filed by shareholders owning more than 50% of outstanding stock (not number of shareholders)

Question 6

When will S-Corp Pay tax

Answer 6

If C-Corp converts to S-Corp

Built in Gains Tax: only if it is a C-Corp to S-Corp and have the built in gain at conversion and sell within 5 years at highest corp rate (current 21%)

Passive Investment Income Tax:
exceeds 25% of gross receipts and has C-Corp earnings at highest corp rate (21%)
- passive investment income: dividends, interest, royalties and rents
- after 3 years of more than 25% gross receipts in passive investment income - can lose s-corp election

Question 7

Sale of S-Corp Interest

Answer 7

Prorated

Sells during the year but remains shareholder - allocate income based on ownership percentage times days held at each percentage
(days held/365 calculation)

Question 8

Passthrough loss for shareholder - stock & debt basis

Answer 8

stock basis vs debt basis (debt is loan to Scorp)
Total Tax Basis is the combo of both

When there is a repayment of loan basis (when basis is gone) - it is all taxable as capital gain : no debt basis left

Debt basis can only be used to pass-through loss

Question 9

Taxable Distributions - Stock & Debt Basis

Answer 9

Ignore debt basis when there is a distribution - capital gain above the stock basis.

Debt basis can only be used to pass-through loss

Question 10

Profits from Scorp and days of Ccorp

Answer 10

Taxed:
1. S-corp earnings: Tax free to AAA (Accumulated adjustments account - taxed once per K-1) - amount of SCorp earnings and profits (retained earnings as SCorp - can be distributed tax free)
2. C-Corp Earnings: Ordinary Dividend from accumulated earnings and profits from CCorp
3. Tax free to basis of stock
4. Excess is treated as a capital gain