S Corporations

Question 1

S corporations

R3-48

Answer 1

tax passes through to the shareholders

Question 2

What is an S corp?

R3-48

Answer 2

• -domestic corp
• -S corp cannot file consolidated tax return w/ C corp
• -S corp can file consolidated tax return w/ S corp

Question 3

Eligible shareholders

Who can be a shareholder?

R3-48

Answer 3

• -individual, estate, or trust
• -individual may not be a nonresident alien
• -cannot be corporation or partnership

Question 4

Shareholder limit

R3-48

Answer 4

there may not be more than 100 shareholders

Question 5

One Class of Stock

R3-48

Answer 5

• -there may not be more than one class of stock outstanding

- -no preferred stock permitted

Question 6

What are the requirements for S Corp?

R3-48

Answer 6

*100 U.S. people are common

• -only 100 sharholders
• -shareholder can be U.S. individual, estate, trust
• -only common stock permitted

Question 7

Election of S Corp Status

R3-48

Answer 7

• -all voting and nonvoting shareholders must consent to elect S corp status
• -if elected by March 15, election is effective Jan 1

Question 8

What is the Corporation’s effect of electing S Corp status?

R3-49

Answer 8

–required year end is Dec 31
–Form 1120S due March 15
–no tax to S Corporation
Exception:
-LIFO Recapture tax
-Built-in Gains tax
-tax on Passive Investment Income

Question 9

No tax to S corp Except:

S Corp has a Built-in Gains Tax if:

R3-49

Answer 9

Tax on S Corp if:
–C Corp elects S Corp status
and
–assets FMV exceeds adj basis on election date

Exception:

• -S Corp was never a C Corp
• -sale or transfer does not occur within 10 yrs
• -appreciation occurred after S election

Question 10

S Corp does not have to pay Built-in Gains tax if:

R3-49

Answer 10

• -S Corp was never a C Corp
• -sale or transfer does not occur within 10 yrs
• -appreciation occurred after S election

Question 11

How is the Built-in Gains Tax calculated?

R3-50

Answer 11

Multiply 35% by the lesser of:
–recognized built-in gain for CY
or
–taxable income of S Corp if it were a C Corp

Question 12

What is the Shareholder’s effect of electing S Corp status?

R3-50

Answer 12

• -S Corps report separately stated items of income and deductions and non-separately stated items of income or loss.
• -allocation to shareholders made on per-share, per-day basis
• -losses are limited to shareholder’s adj basis in stock + direct shareholder loans

Question 13

Which items flow through to the shareholders?

R3-50

Answer 13

*taxed when earned (not when distributed/received)

• -ordinary income not subject to FICA
• -rental income/loss
• -tax-exempt interest*
• -percentage depletion
• -foreign income tax
• -section 1231 gains/losses
• -charitable contributions
• -expense deduction for recovery property
• -unrecaptured section 1250 income
• -gain/loss from sale of collectibles

Question 14

Fringe Benefits

Who can deduct? Who cannot deduct?

R3-51

Answer 14

Deductible Fringe Benefits:

• -non-shareholder employees
• -employee shareholders owning 2% unless included in w-2 income

Question 15

Accumulated Adjustments Account (AAA)

How is in increased? How is it decreased?

R3-52

Answer 15

Increases by:
–separately and non-separately stated income and gains

Decreases by:

• -corp distributions (not below 0)
• -separately and non-separately states exp items and loses
• -nondeductible exp relating to income (except tax-exempt income)

Question 16

Accumulated Adjustments Account (AAA)

What is it?

R3-52

Answer 16

tax effects of distributions from S Corps that have Accumulated E&P since inception/election are computed using the AAA.
*AAA is 0 at inception

Question 17

Computation of Shareholder Basis in S Corp Stock

R3-55

Answer 17

B–Initial Basis
A–Add Income items (include tax-free income)
–Add add’l SH investments in Corp stock
S–Subtract distributions to SH
–Subtract loss or exp items
E–Ending Basis

Question 18

Shareholder can deduct S Corp loss

How is the limitation computed?

R3-55

Answer 18

S Corp SH can deduct on personal tax return the pro rata share of the S Corp loss

Loss limitation= Basis + Direct SH loans - Distributions

Question 19

How are S Corp distributions taxed to SH?
(w/ no C Corp E&P)

R3-55

Answer 19

1--distribution to extent of basis in stock
    -not taxed; reduces stock basis
    -return of capital
2--distribution in excess of stock basis
     -taxed as L-T CG (if held 1+ yr)
     -capital gain distribution

Question 20

How are S Corp distributions taxed to SH?
(w/ C Corp E&P)

R3-56

Answer 20

1--distribution to extent of AAA
    -not taxed; reduces stock basis
2--distribution to extent of C Corp E&P
     -taxed as div; stock basis not reduced
     -old C Corp taxable div
3--distribution to extent of stock basis
    -not taxed; reduces stock basis
    -return of capital
4--distribution in excess of stock basis
     -taxed as L-R CG
    -capital gain distribution

Question 21

How is the S Corp Election Terminated?

R3-56

Answer 21

• -holders of a majority of the stock consent to voluntary revocation
• -Corp fails to meet eligibility requirements
• -25%+ of corp gross receipts are passive for 3 consecutive years w/ C Corp E&P

Question 22

When can S Corp status be re-elected after termination?

R3-56

Answer 22

a new election cannot be made for 5 years unless the IRS consents to an earlier election