S Corp 3 - Distributions and Special Taxes

Question 1

Does S Corp pay tax or only shareholders do?

Answer 1

S Corp is taxed when;
passive investment income exceeds 25% of gross receipts and the S Corp has C corporation accumulated earning and profits.

Question 2

What would be the tax rate when S Corp is taxed?

Answer 2

At the highest corporate rate.

Question 3

What is built-in gains tax?

Answer 3

A C corporation that makes an S election and has unrealized built-in gain in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next 5 years.

Question 4

What is tax rate for built-in gains tax?

Answer 4

Highest corporate tax rate.

Question 5

Question:
A C Corp elected S status on Feb 1, Yr 2. On June 15, Yr 2, the Corp sold a land (AB 100,000) for $200,000 cash. FMV 150,000.
What is the Corp’s tax?

Answer 5

Built-in gain: 50,000 taxed at highest rate (35%) = $17,500.

Recognized gain: 100,000 (200,000-100,000) - flow through to shareholders.

Question 6

What is the order of taxation?

Answer 6

1. Tax-free to the extent of shareholder’s pro rate AAA (accumulated adjustment accounts).
2. Ordinary dividend to the extent of accumulated earnings and profits (from when its was C Corp).
3. Tax-free to the extent of basis in stock.
4. Excess is treated as capital gain.

Question 7

What is AAA (accumulated adjustments account)?

Answer 7

A special account is used to track undistributed earnings of an S corporation that have been taxed to shareholders previously.

Question 8

What is the distribution tax order if the corporation does not have earnings and profits?

Answer 8

1. Tax free to the extent of basis in stock.

2. Excess is treated as capital gain.

Question 9

What does AAA reflect?

Answer 9

The cumulative income and losses for all of the S corporation years that have not been distributed.

Question 10

Accumulated adjustments account: What are the 2 items not included?

Answer 10

Tax exempt income.

The nondeductible expenses related to tax exempt income.

Question 11

Question:
A C Corp elected S status on Jan 1, Yr 4 with earnings and profits of $20,000. In Yr 4, it earned $20,000 and made a cash distribution in Dec, Yr 4 of $50,000. It has only one shareholder. His basis in stock on Jan 1, Yr 4 was $8,000.
How much capital gain will he recognize from the distribution?

Answer 11

Distribution: 50,000.

1. Assuming AAA was $20,000. Therefore, tax-free.
2. $20,000 ordinary income
3. Basis in stock: 8,000 (reduced to $0).
4. 2,000 LT capital gain.

Question 12

When does built-in gain rule apply?

Answer 12

The built in gains tax applies only when an existing C corporation makes an S corporation election.