S Corp 2 - Income Basis

Question 1

How is the portion of share distribution determined?

Answer 1

Allocation = item x ownership% x portion of year owned

Question 2

Where will separately stated items be reported?

Answer 2

Form 1120S and Schedule K.

Question 3

Where will items in bucket reported?

Answer 3

Form 1120S page 1.

Question 4

What happens to the characters of item when they flow through to individuals?

Answer 4

Retain their character.

Question 5

What is the deduction that is allowed for C Corp, but not for S Corp?

Answer 5

Dividend received deduction.

Question 6

What is loss limitations on flow though?

Answer 6

Losses may flow through to the shareholder, but only to the extent of the shareholder’s stock and loan basis.

Question 7

How is loan basis created?

Answer 7

Only when shareholders directly loan funds o the S corporation.

Question 8

Is loan basis also created when guaranteeing debt or S Corp going out and borrowing money?

Answer 8

No.

Question 9

What happens to the losses in excess of deduction allowed?

Answer 9

Carry forward until there is basis to deduct the,.

Question 10

When losses are used against basis and loan basis for deduction, what happens to those basis?

Answer 10

Reduced to 0.

Question 11

Formula to determine the shareholder’s basis in the S Corp?

Answer 11

Initial basis
\+ Stock purchases
\+ Taxable and tax exempt income
- Deductible and non-deductible expenses
- Accumulated adjustments account distribution

Question 12

What is the biggest difference between S Corp and Partnership basis formula?

Answer 12

Shareholder’s basis in S Corp doesn’t change by the change in liability like partnership because shareholders are not liable for liabilities.

Question 13

What are 2 affects of flow through?

Answer 13

Flow through as income.

Flow through to basis.

Question 14

What is the ordering rule for basis?

Answer 14

1. Increase for all income items
2. Decrease for distributions that are excluded from gross income
3. Decreased for nondeductible, non-capital items
4. Decreased for deductible expenses and losses.

Question 15

When must shareholders include fringe benefits in income?

Answer 15

When they own more than 2% of the sock.

Question 16

What are 4 fringe benefits that are included in income?

Answer 16

• Employer paid premiums to health and accident plans
• Benefits paid under employer-sponsored accident and health plans
• Cost of up to $50,000 of employer paid group term life insurance
• Meals and lodging provided by employer

Question 17

What is the tax treatment of health and accident insurance premiums and other fringe benefits paid by S Corp for S Corp and shareholders?

Answer 17

S: Deductible as compensation.
Shareholders: Included in gross income on Form !-2.

Question 18

Can S Corp deduct foreign income taxes? A net Sec. 1231 loss? Investment interest expense? The amortization of organizational expenditures?

Answer 18

All first 3 items no: Items having no special tax characteristics can be netted together in the computation of the S corporation’s ordinary income or loss, with only the net amount passed through to shareholders.

Question 19

Can S Corp deduct charitable contribution?

Answer 19

No since they are subject to percentage limitations at the shareholder level, must be separately stated and are not deductible in computing an S corporation’s ordinary income or loss.