S Corporations Flashcards
S Corporations:
Do S-Corporations pay Federal Income Tax?
No!
S corporations do not pay Federal income tax.
S Corporations:
What type of document does an S Corporation file and why?
They file informational returns (Form 1120S).
S Corporations:
How are S-Corps taxed?
Similar to partnership taxation.
• Ordinary business income (loss) flows through to the shareholders to be reported on their separate returns.
S Corporations:
How are profits (and losses) allocated?
Ordinary business income (loss) and the separately reported items are allocated to the shareholders according to their stock ownership interests.
S Corporations:
Who can claim the qualified basic income deduction?
Shareholders can claim the deduction for qualified business income on their own Form 1040.
S Corporations:
How are S Corporations similar to a Partnership?
Partnership taxation is similar.
S Corporations - Liability:
Do S Corporations have limited or unlimited liability?
Owners have limited liability protection from creditors
S Corporations:
What must FIRST happen in order to achieve S corporation status?
To achieve S corporation status, a corporation must first qualify as a small business corporation
S Corporations:
Can an international company have S Corporation status?
No.
The entity is a domestic corporation.
S Corporations:
How many kinds of stock can an S Corporation issue?
An S Corp can only issues only one class of the stock.
S Corporations:
What is the maximum number of owners for an S Corp?
Ownership is limited to a theoretical maximum of 100 shareholders.
S Corporations:
Can foreigners own shares in an S Corp?
Yes. Only if he/she is a resident of the U.S.
An S-corp may have no nonresident alien shareholders.
S Corporations:
Can a bank be an S Corp?
Not usually.
Small business corporation status is not permitted for non-U.S. corporations or for certain banks and insurance companies.
S Corporations:
Who type of entity can be a shareholder in a S Corp?
Humans
S Corporations:
Can partnerships, corporations, limited liability partnerships, and LLCs own S corporation stock?
No!
S Corporations:
What action/form is required to form an S Corp?
Action = File "Election" Form = IRS on Form 2553.
S Corporations:
What percentage of shareholders must consent to form an S Corp?
100%
Each shareholder owning stock during the election year must consent to the election (even if stock is no longer owned at election date).
S Corporations:
How long will an S Election stay in force?
An S election remains in force until revoked or lost
S Corporations:
What can cause an S Election to be terminated?
(1) Shareholders owning a majority of shares voluntarily revoke the election.
(2) A new shareholder owning more than one-half of the stock affirmatively refuses to consent to the election.
(3) The corporation no longer qualifies as an S corporation.
(4) The corporation fails the passive investment income test.
S Corporations:
[True/False]
If an entity fails to qualify as S corporation at any time after the election has become effective, its status as an S corporation ends
True:
If an entity fails to qualify as S corporation at any time after the election has become effective, its status as an S corporation ends
S Corporations:
What is the “Passive Investment” income limitation?
Passive investment income limitation:
If an S corporation holds C corporation earnings and it generates passive investment income in excess of 25% of its gross receipts for three consecutive taxable years, the S election is terminated as of the beginning of the fourth year.
S Corporations:
A new S election normally cannot be made within ____ years after termination of a prior election.
Five (5)
S Corporations:
[True/False]
An S corporation’s taxable income is determined in a manner similar to the tax rules that apply to partnerships
True:
An S corporation’s taxable income is determined in a manner similar to the tax rules that apply to partnerships
S Corporations:
What is a key difference in how S Corporations and Partnerships handle distributions that experience a loss?
Distribution of loss is passed onto partner w/ S Corp.
S Corporations:
What is the purpose of the “accumulated adjustments account” ?
The accumulated adjustments account (AAA) is a special account to track undistributed earnings of an S corporation that have been taxed to shareholders previously.
S Corporations:
What does “AEP” stand for?
Accumulated Earnings and Profits
S Corporations:
If AEP exists, are distributions taxed or tax-free?
Tax free to the extent of AAA acount.
S Corporations:
Distributions from AEP constitute ______ income.
Answer: Dividend
Distributions from AEP constitute dividend income.
S Corporations:
Dutton Inc. (an S corporation) distributes $1,300 cash to Elsa, its only stockholder, on December 31st.
- Elsa’s basis in her stock is $1,400
- Dutton’s AAA balance is $500
- Dutton holds $750 AEP before the distribution.
(1) What is the tax effect of the distribution?
(2) Elsa’s stock basis after the distribution?
(1) The first $500 of the distribution is a tax-free recovery of basis from the AAA.
(2) The next $750 is a taxable dividend distribution from AEP.
(3) The remaining $50 is a tax-free recovery of basis.
S Corporations:
What is the “AAA bypass election”?
If AEP exists, an S corporation can elect to first distribute AEP before reducing AAA
S Corporations:
How is a gain handled for a non-cash property distribution?
- S corporations recognize a gain on any distribution of appreciated property in the same manner as if the asset were sold to the shareholder at its fair market value.
- The corporate gain is passed through to the shareholders.
- The character of the gain (capital or ordinary) depends on the type of asset being distributed.
S Corporations:
How is a loss handled for a non-cash property distribution?
- S corporations do not recognize a loss when distributing assets that are worth less than their basis.
- The shareholder’s basis is the fair market value.
- Loss property receives a stepdown in basis without any loss recognition by the S corporation, so distributions of loss property should be avoided
S Corporations:
How do S Corporations treat losses?
One major advantage of an S election is the ability to pass through NOLs to the shareholders.
• Shareholder can deduct NOLs for the year in which the S corporation’s tax year ends.
• S corporations do not deduct NOLs.
S Corporations:
Is a shareholders’ basis reduced by an NOL?
Yes.
Shareholder’s basis in the stock is reduced to the extent of any pass-through of the NOL.
S Corporations:
How is the S Corp’s AAA impacted by a NOL?
The S corporation’s AAA is reduced by the same deductible amount.
S Corporations:
How do you calculate Excess Net Pass Income (ENPI)?
([Passive Income - 25% of Gross Receipts] / [Passive Income]) x [Net Passive Investment Income] = ENPI
S Corporations:
What is considered “Passive Investment Income”?
Passive Investment Income (PII) includes gross receipts derived from royalties, passive rents, dividends, interest and annuities.
S Corporations:
- Brennan Inc., an S corporation, generates $264,000 of gross receipts for the year, of which $110,000 is PII.
- Expenditures directly related to the production of the PII total $30,000.
(1) What is Brennan’s PII?
(2) What is its ENPI?
(3) What PII tax will it pay?
- Net PII is $110,000 - $30,000 = $80,000
- PII minus 25% of gross receipts = $110,000 – ($264,000 x 25%) = $44,000
- ENPI = ($44,000/$110,000) x $80,000 = $32,000
- PII tax = $32,000 x 21% = $6,720
S Corporation vs. Partnerships:
How is the formation of each different?
When you form a partnership, you don’t have to file any forms or paperwork with the state.
In fact, a partnership is created when two people work on a business together. You can form a partnership without much planning or intent to start a business.
On the other hand, an S corporation will require more specific and complex steps to be formed and registered.
S Corporation vs. Partnerships:
How does Structure Flexibility differ?
In order to register and operate as an S corporation, the business is required to elect a board of directors. The company must also allow the board to vote on any major issues that impact the company.
A partnership or LLC can be run with the owners’ majority vote or by a manager.
