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CPA: Regulation > S-Corp Taxation > Flashcards

S-Corp Taxation Flashcards

1
Q

Can start-up costs be written off over 180 months with an immediate deduction for:
Partnerships?
S-corps?
C-corps?

A

YES

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2
Q

DO both capital gains and municipal bonds increase partner basis?

A

YES

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3
Q

What is the name of the tax return for an S-Corp? When is it due?

A

1120S

March 15th

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4
Q

S-Corp: How are salaries to partners handled?

A

Officer’s salaries may be deducted from the business

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5
Q

Does an S-Corp pay taxes?

A

No, the business does not pay taxes. Income/Loss flows through to the stockholders.

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6
Q

What is the minimum number of stockholders in an S-Corp?

A

1

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7
Q

What schedule does pass-through income get reported to partners on?

Where does it get reported on the 1040?

A

Schedule K-1

1040, Schedule 1- Additional Income

Interest/Dividends - Schedule B

Capital Gains/Losses - Schedule D

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8
Q

What happens to income even if it is not distributed to stockholders in regards to tax?

A

Stockholders still pay income tax in the year earned, even if not distributed.

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9
Q

S-Corp formation return?

A

Form 2553

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10
Q

S-corp timely election means

A

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.

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11
Q

What happens if you do not make a timely election to be considered an S-corp?

A

Considered a C-corp for the full first year. S-Corp starting Jan 1, Year 2.

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12
Q

Once an S-corp is established, can it be lost?

A

Yes, it is possible to lose S-corp status and revert back to a C-corp (and thus get hit with double taxation)

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13
Q

What would happen if an S-corp has 101 shareholders?

A

Revert to a C-corp

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14
Q

Dad, son, daughter - how many shareholders

A

1

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15
Q

How many classes of stock are allowed in an S-corp?

A

Only 1 class

Preferred stock = lose S-corp status

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16
Q

Can estates, trusts, bankruptcy estates be shareholders of an S-corp?

A

YES

17
Q

How are debts handled differently between S-corps and partner

A

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.

18
Q

In an S-corp, does tax-exempt interest increase the basis of a stockholder?

A

YES

ALL income, whether taxable or not increase the basis of an S corp stockholder.

19
Q

What is rule IRC Section 311?

A

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.

20
Q

What happens if a S-corp sells any interest in the S-corp to a C-corp?

A

The S-Corp would lose its S-corp status

21
Q

If an S-corp loses their status on April 1, how are they taxed in that year?

A

S-corp from Jan 1 - March 31.

C-corp from April 1 - Dec 31.

22
Q

Does election or revocation of S-corp status require unanimous consent of shareholders?

A

NO, a revocation of S election may be filed by shareholders owning more than 50% of an S-corp’s outstanding voting stock.

23
Q

Does an S-corp ever pay tax?

A

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%.

24
Q

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?

A

S-Corp status would be terminated as of the beginning of the 4th year

25
Q

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?

A

100% x 59/365 = $1,616
80% x 306/365 = $6,707

=$8,323 of income

26
Q

In what order are S-Corp earnings and profits distributed?

A
  • 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
27
Q

What does S-corp shareholder’s limited liability mean?

A

It means that they can’t lose more than their investment.

28
Q

Does a bank loan guaranteed by an S-corp shareholder increase basis?

A

No, only loans made by the shareholder to the corporation increase basis.

29
Q

What happens when an LLC distributes appreciated property to a shareholder?

A

Appreciated assets can be distributed tax-free, just like in a partnership.

30
Q

Accumulated Adjustments Account (AAA) reports what?

A

Reports undistributed earnings of an S-corp. These earnings have been previously taxed to the S-corp shareholders.

31
Q

Conversion from C-Corp to S-Corp:

Requires consent of how many shareholders?

A

Unanimous consent

32
Q

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.

A

5 years

33
Q

How much passive income must a S-corp have to lose their S-corp status?

A

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.

34
Q

Are tax exempt interest and income included in AAA?

A

NO

Because it only includes amounts that have been previously taxed to shareholders

35
Q

If an S-corp shareholder owns 2% or more of the stock, how are health insurance premiums paid by the S-corp handled?

A

Included in the shareholder’s gross income.

36
Q

Premiums paid on key officers (company is beneficiary) ARE or ARE NOT deducted to arrive at S-corp ordinary business income.

A

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.

37
Q

S-Corp distribution partially from earnings from days as a C-Corp

A

1: AAA - tax free, subtract, reduces basis
2: AEP - dividend
3: Analyze leftover distribution vs. basis - CAPITAL GAIN

CPA: Regulation (24 decks)

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