S Corporation Taxation Flashcards
S-Election (files 1120S - Single taxation)
Only made by a Corporation, and retains the legal corporate status after the election – Only used for FEDERAL TAX PURPOSES
Corp Characteristics:
- Shares freely transferred
- No liable for corporate debt
- Shareholders can be employees
*NO DRD deduction
Eligibility Requirements (very inflexible structure)
- No more than 100 shareholders (married treated as one)
* Family can elect that all treated as one - Shareholders can ONLY be individuals, estates, and certain trusts
- Non-resident alien no eligible
- ONLY one class of stock (be distinguish voting/nonvoting)
- Banks/Insurance Companies are NOT eligible
Election Requirements
TO be effective for the current tax year has to be made by 15th DAY OF THIRD MONTH of the TAX YEAR
ALL individuals owning stock MUST consent
Termination of S-Status
MUST wait 5 years before re-electing
OCCURS if shareholders owning MORE THAN 50% elect to revoke the election
OR
IF any eligibility requirements are violated
Termination of S-Status (Passive Income Rule)
IF passive investment income:
- EXCEEDS 25% of gross receipts for 3 years AND
- The S-Corp has accumulated E&P
THEN the S-election is terminated at beginning of 4th year
Income flow-through
ANY income, losses, deduction, and credits that can affect shareholders differently are SEPARATELY stated from “bucket items” and reported on a pro-rata portion
- Bucket is front page of 1120S
- ALLOCATION = item * ownership % * portion of year owned (if applicable)
Loss Limitations
MAY flow through to the shareholder, but ONLY to the extent of the shareholder’s stock and loan BASIS
LOAN basis - created when shareholder loans funds directly to the S-Corp
DISALLOWED losses - Carried forward until there is basis to deduct them
Basis in Stock - Shareholder
Initial Basis \+ stock purchases \+ taxable and tax-exempt income - AAA distributions - deductible/non-ded expenses
***AAA = accumulated adj. acct.
Major Differences between S-Corps and Partnerships
- Allocation
- Debt of the S-Corp does NOT increase shareholder basis; this is because a shareholder in a s-corp is not responsible for that debt so do not get any basis for it
- S-Corp - Can be employees
- Partners in partnership are taxed on most fringe benefits
- Possibility of paying taxes at s-corp level
- Patnership Dist generally tax free unless cash > basis;
* *s-corp rules are almost same as corp rules
Fringe Benefits - Shareholders
Shareholders who own more than 2% of stock they are treated as partners for fringe benefit purposes meaning the following are included in income
- Employer paid premiums to health/accident plans
- Benefits under sponsored accident/health plans
- Cost of up to 50,000 of employer paid group term life ins.
- Meals/lodging prov. by employer
Passive Investment Income Tax
If the passive investment income exceeds 25% of gross receipts and has AE&P, a tax is IMPOSED at the HIGHEST corporate rate (currently 35%)
Built-In Gains Tax
C-Corp that makes an S election and has unrealized BIG in its assets as of the election day, MUST pay a BIG tax on this appreciation if it is recognized within the NEXT 5 YEARS
HIGHEST corporate rate
***To avoid electing s-corp status when a corp is liquidating with appreciated assets
Distributions w/ E&P
If the corporation has E&P, ditributions are taxed in the following order:
1. Tax free to the extent of AAA
- Ordinary dividend income to the extent of AE&P
- Tax free to the extent of basis
- Excess is CAP GAIN
**2,3,4 is the same as C-Corp - just add #1 for S-Corp
**IF no E&P just use #3 & #4
AAA - Accumulated Adjustments Account
Cumulative income and losses from all years that have not been distributed (during years as s-corp e&p)
ONLY tax-exempt income and non-deductible expenses related to tax-exempt income are EXCLUDED
