S-Corp Taxation Flashcards
Can start-up costs be written off over 180 months with an immediate deduction for:
Partnerships?
S-corps?
C-corps?
YES
DO both capital gains and municipal bonds increase partner basis?
YES
What is the name of the tax return for an S-Corp? When is it due?
1120S
March 15th
S-Corp: How are salaries to partners handled?
Officer’s salaries may be deducted from the business
Does an S-Corp pay taxes?
No, the business does not pay taxes. Income/Loss flows through to the stockholders.
What is the minimum number of stockholders in an S-Corp?
1
What schedule does pass-through income get reported to partners on?
Where does it get reported on the 1040?
Schedule K-1
1040, Schedule 1- Additional Income
Interest/Dividends - Schedule B
Capital Gains/Losses - Schedule D
What happens to income even if it is not distributed to stockholders in regards to tax?
Stockholders still pay income tax in the year earned, even if not distributed.
S-Corp formation return?
Form 2553
S-corp timely election means
First become a C-corp, then make a timely election within 75 days (2.5 months) by filing Form 2553 to become a S-corp. Election reverts back to first day of formation as long as it is timely.
What happens if you do not make a timely election to be considered an S-corp?
Considered a C-corp for the full first year. S-Corp starting Jan 1, Year 2.
Once an S-corp is established, can it be lost?
Yes, it is possible to lose S-corp status and revert back to a C-corp (and thus get hit with double taxation)
What would happen if an S-corp has 101 shareholders?
Revert to a C-corp
Dad, son, daughter - how many shareholders
1
How many classes of stock are allowed in an S-corp?
Only 1 class
Preferred stock = lose S-corp status
Can estates, trusts, bankruptcy estates be shareholders of an S-corp?
YES
How are debts handled differently between S-corps and partner
If a partnership borrows money, the partner are automatically liable for the partnership debts (and thus increase basis).
If S-corp borrow money, do NOT increase the basis of the S-corp shareholder for the outside loan from a bank.
In an S-corp, does tax-exempt interest increase the basis of a stockholder?
YES
ALL income, whether taxable or not increase the basis of an S corp stockholder.
What is rule IRC Section 311?
Controls the taxability of corporate distributions.
An S-corp (and C corp) recognize a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.
What happens if a S-corp sells any interest in the S-corp to a C-corp?
The S-Corp would lose its S-corp status
If an S-corp loses their status on April 1, how are they taxed in that year?
S-corp from Jan 1 - March 31.
C-corp from April 1 - Dec 31.
Does election or revocation of S-corp status require unanimous consent of shareholders?
NO, a revocation of S election may be filed by shareholders owning more than 50% of an S-corp’s outstanding voting stock.
Does an S-corp ever pay tax?
In a few rare exceptions:
-S-corp sells property that contained a BUILT-IN GAIN at the time of the S-election
(if S-corp from inception, no worries about a built-in gains tax)
-If the S-corp has PASSIVE INVESTMENT INCOME (dividends, interest, royalties, rents) and it exceeds 25% of gross receipts and the S-corp has C-corp earnings and profits (from its earlier days). The tax on the passive investment income is 21%.
What happens if more than 25% of the S-corp’s gross receipts come from passive investment income for 3 consecutive years AND the S-Corp has C-corp earnings and profits (from its days as a C-corp) for each of those 3 years?
S-Corp status would be terminated as of the beginning of the 4th year
If X owned 100% of the S-Corp on 1/1 but SOLD 20% of the shares on 2/28 which is the 59th day of the year. What is the income for Shareholder X?
100% x 59/365 = $1,616
80% x 306/365 = $6,707
=$8,323 of income
In what order are S-Corp earnings and profits distributed?
- Tax-free to the extent AAA (Accumulated Adjustments Account, taxed once per K-1)
- Ordinary Dividend to the extent of Accumulated Earnings and profits from days as a C-Corp
- Tax free to the extent of basis in the the stock
- Excess is treated as a Capital Gain
What does S-corp shareholder’s limited liability mean?
It means that they can’t lose more than their investment.
Does a bank loan guaranteed by an S-corp shareholder increase basis?
No, only loans made by the shareholder to the corporation increase basis.
What happens when an LLC distributes appreciated property to a shareholder?
Appreciated assets can be distributed tax-free, just like in a partnership.
Accumulated Adjustments Account (AAA) reports what?
Reports undistributed earnings of an S-corp. These earnings have been previously taxed to the S-corp shareholders.
Conversion from C-Corp to S-Corp:
Requires consent of how many shareholders?
Unanimous consent
Conversion from C-Corp to S-Corp:
If the former C-corp waits ___ years before distributing appreciated assets, then no built-in gains tax would be applied on the built-in gain in the current year.
5 years
How much passive income must a S-corp have to lose their S-corp status?
This rule doesn’t apply if they were an S-corp from inception. The 25% rule only applies if they converted from a C-corp to an S-corp.
Are tax exempt interest and income included in AAA?
NO
Because it only includes amounts that have been previously taxed to shareholders
If an S-corp shareholder owns 2% or more of the stock, how are health insurance premiums paid by the S-corp handled?
Included in the shareholder’s gross income.
Premiums paid on key officers (company is beneficiary) ARE or ARE NOT deducted to arrive at S-corp ordinary business income.
ARE NOT deducted. This is because there is no tax due on proceeds from the policy when the officer dies.
They ARE a separately stated item that reduces shareholder basis.
S-Corp distribution partially from earnings from days as a C-Corp
1: AAA - tax free, subtract, reduces basis
2: AEP - dividend
3: Analyze leftover distribution vs. basis - CAPITAL GAIN
