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Tax 2 > S Corporations > Flashcards

S Corporations Flashcards

1
Q

S Corporations:

Do S-Corporations pay Federal Income Tax?

A

No!

S corporations do not pay Federal income tax.

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2
Q

S Corporations:

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

A

They file informational returns (Form 1120S).

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3
Q

S Corporations:

How are S-Corps taxed?

A

Similar to partnership taxation.

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

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4
Q

S Corporations:

How are profits (and losses) allocated?

A

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

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5
Q

S Corporations:

Who can claim the qualified basic income deduction?

A

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

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6
Q

S Corporations:

How are S Corporations similar to a Partnership?

A

Partnership taxation is similar.

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7
Q

S Corporations - Liability:

Do S Corporations have limited or unlimited liability?

A

Owners have limited liability protection from creditors

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8
Q

S Corporations:

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

A

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

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9
Q

S Corporations:

Can an international company have S Corporation status?

A

No.

The entity is a domestic corporation.

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10
Q

S Corporations:

How many kinds of stock can an S Corporation issue?

A

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

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11
Q

S Corporations:

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

A

Ownership is limited to a theoretical maximum of 100 shareholders.

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12
Q

S Corporations:

Can foreigners own shares in an S Corp?

A

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

An S-corp may have no nonresident alien shareholders.

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13
Q

S Corporations:

Can a bank be an S Corp?

A

Not usually.

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

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14
Q

S Corporations:

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

A

Humans

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15
Q

S Corporations:

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

A

No!

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16
Q

S Corporations:

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

A 
Action = File "Election"
Form =  IRS on Form 2553.
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17
Q

S Corporations:

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

A

100%

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

18
Q

S Corporations:

How long will an S Election stay in force?

A

An S election remains in force until revoked or lost

19
Q

S Corporations:

What can cause an S Election to be terminated?

A

(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.

20
Q

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

A

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

21
Q

S Corporations:

What is the “Passive Investment” income limitation?

A

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.

22
Q

S Corporations:

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

A

Five (5)

23
Q

S Corporations:

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

A

True:

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

24
Q

S Corporations:

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

A

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

25
Q

S Corporations:

What is the purpose of the “accumulated adjustments account” ?

A

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

26
Q

S Corporations:

What does “AEP” stand for?

A

Accumulated Earnings and Profits

27
Q

S Corporations:

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

A

Tax free to the extent of AAA acount.

28
Q

S Corporations:

Distributions from AEP constitute ______ income.

A

Answer: Dividend

Distributions from AEP constitute dividend income.

29
Q

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?

A

(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.

30
Q

S Corporations:

What is the “AAA bypass election”?

A

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

31
Q

S Corporations:

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

A
  • 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.
32
Q

S Corporations:

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

A
  • 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
33
Q

S Corporations:

How do S Corporations treat losses?

A

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.

34
Q

S Corporations:

Is a shareholders’ basis reduced by an NOL?

A

Yes.

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

35
Q

S Corporations:

How is the S Corp’s AAA impacted by a NOL?

A

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

36
Q

S Corporations:

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

A

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

37
Q

S Corporations:

What is considered “Passive Investment Income”?

A

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

38
Q

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?

A
  • 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
39
Q

S Corporation vs. Partnerships:

How is the formation of each different?

A

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.

40
Q

S Corporation vs. Partnerships:

How does Structure Flexibility differ?

A

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.

Tax 2 (12 decks)

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