S Corp - Sec 3

Question 1

1120S

Answer 1

3/15

Formally bc shareholders have limited liability

Similar to partnership

Question 2

K1

Answer 2

Represents shareholders portion

Flow through to schedule E then to face of 1040

Not tax paying entity

S Corp dividends not taxable

Question 3

SCorp

Answer 3

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

Question 4

Formation

Answer 4

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%

Question 5

Operation of S Corp

Answer 5

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

Question 6

Basis

Answer 6

Can’t go negative ,

Question 7

Ordinary assets

Answer 7

Current assets

Question 8

1231 assets

Answer 8

Non current

Depreciable
Amortizable
Land used
Property plan equipment

Question 9

Capital assets

Answer 9

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.

Question 10

Income

Answer 10

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

Question 11

Losses

Answer 11

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

Question 12

A Corp basis

Answer 12

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

Question 13

Passive activity loss

Answer 13

Passive losses are limited to passive income

Question 14

Municipal bond interest

Answer 14

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

Question 15

Distributions received

Answer 15

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

Question 16

C before S

Answer 16

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 .

Question 17

Separately stated items ***

Answer 17

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

Question 18

Limitations

Answer 18

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

Question 19

Ordinary business income ***

Answer 19

Before separately stated items

Schedule k is 100% of a Corp.

K1 represents SH percentage

Flows to schedule e

Question 20

Distributions for SH

Answer 20

Distribution reduces net basis

Question 21

AAA

Answer 21

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

Question 22

AEP

Answer 22

Are profits that were accumulated and never taxed during C Corp taxable years
.

Taxable as divided income

Question 23

Return of basis

Answer 23

Third used for distribution, if used then extra money would be capital gain

Question 24

S Corp termination

Answer 24

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

Question 25

Built in Gains tax - BIG

Answer 25

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