S Corporations Flashcards
The shareholder’s initial basis is the amount of:
any cash contributed, the adjusted basis of any property contributed, and the FMV of any services contributed in exchange for stock
The S corp’s basis in any property is the same as the contributing shareholder’s basis.
Qualifications to be an S corp
it must be domestic
shareholders must be individuals/estates/trusts (can’t be a nonresident alien, corporation, or partnership)
may be no more than 100 shareholders (family members may elect to be treated as one shareholder)
there may only be one class of stock (but differences in common stock voting rights is allowed; preferred stock is not permitted)
What are the 3 taxes that may be imposed if the S corp was previously taxed as a C corp
LIFO recapture tax, built-in gains tax, and tax on passive investment income
What is a built-in gain?
When a C corp elects S corp status and the FMV of an asset exceeds the adjusted basis on the election date. The sale of the asset must occur within 5 years of the day the S election was effective.
The tax is 21% of the lesser of: recognized built-in gain for the current year or the taxable income of the S corp if it were a C corp
What are some examples of separately stated items? These flow through separately to the shareholder in a manner similar to a partnership
rental real estate income/loss, interest income, dividend income, royalties, net ST capital gain/loss, net LT capital gain/loss, net section 1231 gain/loss, charitable contributions, section 179 expense deduction
When are fringe benefits deductible/nondeductible?
for non-shareholder employees and those who own 2% or less of the S corp, the fringe benefits are deductible by the S corp in calculating ordinary business income
for those who own more than 2%, it is not deductible by the S corp unless they include the benefits in the employee/shareholder’s W2 income
When are S corp shareholders allowed to deduct a loss?
In this order, the shareholder must clear: tax basis limitation, at-risk limitation, passive activity loss (PAL) limitation, and excess business loss limitation
tax basis and at-risk are at the entity level while the PAL and excess business loss are at the individual level
What is the accumulated adjustments account (AAA)?
it is the E&P during the years the corp is an S corp; distributions may not reduce it below zero, but S corp losses and deductions can cause AAA to be negative
ordinary income, separately stated income and gain items (other than tax-exempt) increase AAA
ordinary losses, separately stated losses and deductions, nondeductible expenses (other than expenses related to tax-exempt income), and distributions (may not reduce AAA below zero) decrease AAA
What is the other adjustments account (OAA)?
it is an account to keep a cumulative record of items that affect S corp shareholders’ stock basis, but do not affect AAA (it does not affect the taxability of S corp distributions); this includes:
tax-exempt interest on muni bonds and related expenses
tax-exempt life insurance proceeds and related nondeductible premiums
federal taxes paid or accrued in an S corp year that relate to C corp years
When can a distribution be taxable to a shareholder?
If the S corp has prior C corp E&P from before the S election was made. Distribution to the extent of stock basis is not taxable and reduces the basis in stock (return of capital), but distribution in excess of stock basis is taxed as a LT capital gain (if held more than a year)
When can S corp status be terminated?
shareholders holding more than 50% of the stock consent to revocation (they can elect a specific effective date…if not, it is effective January 1 of the current year if filed by March 15 or January 1 of the following year if filed after March 15)
the S corp fails to meet the qualifications of S status (S corp status is terminated immediately)
more than 25% of the gross receipts are from passive investment income for 3 consecutive years (but only if the S corp has prior C corp E&P); S corp status is terminated at the beginning of the fourth year
T/F: when S corp status is terminated, there will be two short tax years
True; part as an S corp and the other as a C corp. The corporation must allocate the income for the year in one of two ways: based on relative number of days or close the books on the date of conversion
When can a corporation re-elect its S corp status?
the corporation must wait until the beginning of the 5th year after the year of termination
How is the liquidation of an S corp treated?
the same as a C corp; the corporation will recognize gain/loss on the distribution of property as if it were sold at the FMV (distributions to related parties do not qualify for loss recognition)
for shareholders, the distribution from liquidation is treated as payments in exchange for stock…cash received + FMV of property received - liabilities assumed = amount realized –> amount realized - basis in stock = taxable gain/loss
