S Corporations

Question 1

S Corporations:

Do S-Corporations pay Federal Income Tax?

Answer 1

No!

S corporations do not pay Federal income tax.

Question 2

S Corporations:

What type of document does an S Corporation file and why?

Answer 2

They file informational returns (Form 1120S).

Question 3

S Corporations:

How are S-Corps taxed?

Answer 3

Similar to partnership taxation.

• Ordinary business income (loss) flows through to the shareholders to be reported on their separate returns.

Question 4

S Corporations:

How are profits (and losses) allocated?

Answer 4

Ordinary business income (loss) and the separately reported items are allocated to the shareholders according to their stock ownership interests.

Question 5

S Corporations:

Who can claim the qualified basic income deduction?

Answer 5

Shareholders can claim the deduction for qualified business income on their own Form 1040.

Question 6

S Corporations:

How are S Corporations similar to a Partnership?

Answer 6

Partnership taxation is similar.

Question 7

S Corporations - Liability:

Do S Corporations have limited or unlimited liability?

Answer 7

Owners have limited liability protection from creditors

Question 8

S Corporations:

What must FIRST happen in order to achieve S corporation status?

Answer 8

To achieve S corporation status, a corporation must first qualify as a small business corporation

Question 9

S Corporations:

Can an international company have S Corporation status?

Answer 9

No.

The entity is a domestic corporation.

Question 10

S Corporations:

How many kinds of stock can an S Corporation issue?

Answer 10

An S Corp can only issues only one class of the stock.

Question 11

S Corporations:

What is the maximum number of owners for an S Corp?

Answer 11

Ownership is limited to a theoretical maximum of 100 shareholders.

Question 12

S Corporations:

Can foreigners own shares in an S Corp?

Answer 12

Yes. Only if he/she is a resident of the U.S.

An S-corp may have no nonresident alien shareholders.

Question 13

S Corporations:

Can a bank be an S Corp?

Answer 13

Not usually.

Small business corporation status is not permitted for non-U.S. corporations or for certain banks and insurance companies.

Question 14

S Corporations:

Who type of entity can be a shareholder in a S Corp?

Answer 14

Humans

Question 15

S Corporations:

Can partnerships, corporations, limited liability partnerships, and LLCs own S corporation stock?

Answer 15

No!

Question 16

S Corporations:

What action/form is required to form an S Corp?

Answer 16

Action = File "Election"
Form =  IRS on Form 2553.

Question 17

S Corporations:

What percentage of shareholders must consent to form an S Corp?

Answer 17

100%

Each shareholder owning stock during the election year must consent to the election (even if stock is no longer owned at election date).

Question 18

S Corporations:

How long will an S Election stay in force?

Answer 18

An S election remains in force until revoked or lost

Question 19

S Corporations:

What can cause an S Election to be terminated?

Answer 19

(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.

Question 20

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

Answer 20

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

Question 21

S Corporations:

What is the “Passive Investment” income limitation?

Answer 21

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.

Question 22

S Corporations:

A new S election normally cannot be made within ____ years after termination of a prior election.

Answer 22

Five (5)

Question 23

S Corporations:

[True/False]
An S corporation’s taxable income is determined in a manner similar to the tax rules that apply to partnerships

Answer 23

True:

An S corporation’s taxable income is determined in a manner similar to the tax rules that apply to partnerships

Question 24

S Corporations:

What is a key difference in how S Corporations and Partnerships handle distributions that experience a loss?

Answer 24

Distribution of loss is passed onto partner w/ S Corp.

Question 25

S Corporations: What is the purpose of the "accumulated adjustments account" ?

Answer 25

The accumulated adjustments account (AAA) is a special account to track undistributed earnings of an S corporation that have been taxed to shareholders previously.

Question 26

S Corporations: What does "AEP" stand for?

Answer 26

Accumulated Earnings and Profits

Question 27

S Corporations: If AEP exists, are distributions taxed or tax-free?

Answer 27

Tax free to the extent of AAA acount.

Question 28

S Corporations: Distributions from AEP constitute ______ income.

Answer 28

Answer: Dividend Distributions from AEP constitute dividend income.

Question 29

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?

Answer 29

(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.

Question 30

S Corporations: What is the "AAA bypass election"?

Answer 30

If AEP exists, an S corporation can elect to first distribute AEP before reducing AAA

Question 31

S Corporations: How is a gain handled for a non-cash property distribution?

Answer 31

* 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.

Question 32

S Corporations: How is a loss handled for a non-cash property distribution?

Answer 32

* 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

Question 33

S Corporations: How do S Corporations treat losses?

Answer 33

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.

Question 34

S Corporations: Is a shareholders' basis reduced by an NOL?

Answer 34

Yes. Shareholder’s basis in the stock is reduced to the extent of any pass-through of the NOL.

Question 35

S Corporations: How is the S Corp's AAA impacted by a NOL?

Answer 35

The S corporation’s AAA is reduced by the same deductible amount.

Question 36

S Corporations: How do you calculate Excess Net Pass Income (ENPI)?

Answer 36

([Passive Income - 25% of Gross Receipts] / [Passive Income]) x [Net Passive Investment Income] = ENPI

Question 37

S Corporations: What is considered "Passive Investment Income"?

Answer 37

Passive Investment Income (PII) includes gross receipts derived from royalties, passive rents, dividends, interest and annuities.

Question 38

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?

Answer 38

* 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

Question 39

S Corporation vs. Partnerships: How is the formation of each different?

Answer 39

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.

Question 40

S Corporation vs. Partnerships: How does Structure Flexibility differ?

Answer 40

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.