S Corporations

Question 1

C Corp Eligibility:

Answer 1

No more than 100 SHs (husband/wife or family can count as one, individuals and their estates as well)
Shareholders can only be individuals, estates and certain trusts
SHs cannot be non-resident alients
Only one class of stock (Voting/Nonvoting isn’t different)

Banks and Insurance companies cannot be S Corps

Question 2

To elect to be a S Corp:

Answer 2

Must be filed on or before 15th of third month in a tax year to take effect for whole year, otherwise it takes effect the following year.
All individuals owning stock any time during year must consent.

Question 3

Termination of S Corporation occurs when:

Answer 3

• SHs with more than 50% of voting/nonvoting stock elect to revoke it
• Any eligibility requirements is violated
• S Corp’s passive investment income is >25% of gross receipts for 3 consecutive tax years and the S Corp had Accumulated E&P (from previous C Corp or merger with C Corp)

S-Corp is terminated BOY 4th year and must wait 5 years before re-electing S status. It must use accrual basis accounting when it reverts back to C Corp, it can keep same calendar year.

Question 4

Loss Limitations for S Corp:

Answer 4

Losses are limited to extent of stock and loan basis.(Distributions reduces basis first)
Loan basis is when SHs loans funds directly to S Corp.

Disallowed losses are carried forward until there is basis to deduct them.

Question 5

Basis in Stock is affected how positively and negatively:

Answer 5

Increases:
Stock Purchases
Taxable/Tax-exempt Interest

Decreases
Deductible and non-deductible expenses
AAA (accumulated adjustments account) distributions

Question 6

Fringe benefits for S Corp SHs:

Answer 6

When a SH owns more than 2% of stock, they must include these items in income:
Employer paid premiums to health/accident plans
Benefits paid under those plans
Cost of up to $50K of employer paid group term life insurance
Meals/Lodging provided by employer

Question 7

Cash dividends distributed to shareholders are treated how by shareholder:

Answer 7

They are not included on their return, it is not double taxed.

Question 8

Passive Investment Tax for S Corp threshold:

Answer 8

If passive investment income is >25% of gross receipts and S Corp has Accumulated E&P, the tax is imposed at the highest corporate rate.

Question 9

Built-In Gains Rules for S Corps:

Answer 9

A C Corp (and only a C Corp) that has an unrealized built-in gain in its assets on election day must pay the tax on it if it is recognized within the next 10 years.

For assets sold in tax years 2012 and 2013, the recognition period is reduced to 5 years from first day of the first tax year.

Taxed at highest corporate rate.

Question 10

Ordering rules for distributions (with A E&P)

Answer 10

Tax-free to extent of AAA
Ordinary to extent of accumulated E&P
Tax-free to extent of stock basis
Excess is capital gain

Question 11

Ordering rules for distribution (w/o E&P)

Answer 11

Tax-free to extent of basis

Excess is capital gain

Question 12

Difference between AAA and E&P

Answer 12

AAA excludes tax-exempt interest and nondeductible expenses and is for the cumulative income and losses for S corp years