S Corp - Sec 3 Flashcards
1120S
3/15
Formally bc shareholders have limited liability
Similar to partnership
K1
Represents shareholders portion
Flow through to schedule E then to face of 1040
Not tax paying entity
S Corp dividends not taxable
SCorp
Small and simple
No more than 100 shareholders
Domestic corp
All shareholders residents or citizens
Each share gets equal amount
Some have voting and some don’t
Formation
No tax in creation if control - over 80%
Services or less than 80 then taxable at FMV
Similar to c Corp
Carryover basis and carryover holding period for cash and property
To become an s Corp is a unanimous election- has to be before 3/15 (2.5m) to be considered and retroactive for whole year. calendar or fiscal - if after than c Corp then next year will be a Corp.
You will get accumulated earnings and profits as c Corp -
To get out it takes 50%
Operation of S Corp
Initial contribution
\+% income % loss Separate stated Municipal bond Equity method: investment follows equity balance, when you have income you make money then s Corp makes money, basis goes up .
- distributions received
(2 other factors talked about later)
Equals net basis
Dividends not taxed bc already taxed when earned
Basis
Can’t go negative ,
Ordinary assets
Current assets
1231 assets
Non current
Depreciable
Amortizable
Land used
Property plan equipment
Capital assets
A capital gain or loss, not 1231 or ordinary
If it’s a gain you get a capital treatment,
If it’s a loss then ordinary
Loss gets carried over and proportion share is taken until zero.
Income
Ordinary income or loss plus muni bond interest plus separately stated items …
Calculate an average daily basis :on average, in a daily basis, how much stock did you own . That’s the percent you’ll get .
Ex. Calculate by day . So income times days , then x your percentage of stock is your portion of income
Losses
Basis limitation, losses are limited to amount invested plus amount loaned to company (aka debt basis)
Losses can’t go below 0
Losses are suspended until SH has sufficient basis to absorb the loss
A Corp basis
Basis is often equal to amount at risk
At risk rules: losses are further limited by the investors amount at risk . Under irc 465 similar to basis rules . Amounts at risk do not include amounts for which the investors bears no economic risk of loss like non recourse loans and loans from certain related parties
Passive activity loss
Passive losses are limited to passive income
Municipal bond interest
Not taxable
But SCorp is worth more with it so shouldn’t basis go up? Yes
Increases basis but not taxable .
Not considered taxable income
Distributions received
Reduces basis , but not taxed when received
Dividends already taxed when money earned on k-1
When they pay out the dividend money it just reduces basis bc its an accumulated adjustment account- triple a: represents money that was earned as an S Corp
C before S
If you make money as c Corp it’s Accumulated Earnings and Profits
Money as S Corp is triple A
So when s Corp starts paying money out, first it’ll come out of triple A which isn’t taxable. The next amount out of AEP which was never paid out so would be dividend income . After that the initial contribution would be next to get paid out if needed, which is a return of basis, not taxable since it’s already after tax dollars used to buy something .
If you get more than initial, that’s a capital gain .
Separately stated items ***
Subject to certain limitations on individual tax return
Capital loss and charitable sub Jeff to 50% and 5years forward
Ex capital loss limitation of 3k we have to keep track throughout the years. (50% agi 5years carryover)
Example: you get a 10% of all these deductions, but you need to bring them into 1040 separately- video . They go into different schedules
Limitations
Capital gains and losses: 3k net loss
1231 gains and losses: are non current assets, gains are capital , losses are ordinary . Capital gain goes vs capital loss no more than 3k.
Section 179 is depreciation : 50k??
Rent and royalty income : passive activity loss is no more than 25k and phases out 50cents per dollar over 100k
Charitable contributions: 5 yrs 3k????
Interest income and interest expense get netted out .
Dividend Interest- limitation
Ordinary business income ***
Before separately stated items
Schedule k is 100% of a Corp.
K1 represents SH percentage
Flows to schedule e
Distributions for SH
Distribution reduces net basis
AAA
Represents the cumulative total of industry cited net income items for an s Corp for years after ‘82
Not taxable bc already taxed in k1
AEP
Are profits that were accumulated and never taxed during C Corp taxable years
.
Taxable as divided income
Return of basis
Third used for distribution, if used then extra money would be capital gain
S Corp termination
Rule violation : shareholder non resident -
Over 100 shareholders
Or 50%
Once terminated can’t be s Corp for 5 years
SEC section 1362, termination will occur if an s Corp has passive investment income exceeding 25% if it’s gross receipts , for each of 3 consecutive years. And if during the Corp was a corporation with AEP attributable to prior c Corp status (passive income)
Can happen anytime during year resulting s Corp short year and c Corp short year . No special election, income allocated between the 2 based on a 365 Day year
Built in Gains tax - BIG
If c Corp elect to be a Corp, and fmv if the assets exceeds their basis then difference is a net unrealized built in gain .
S Corp has better rate for gains . Individual capital gains rate
