S Corporations

Question 1

What are the requirements to be an S Corp?

Answer 1

<=100 shareholders
S/H must be individuals
S/H must be residents or citizens of US
Corporation must be domestic
Only one class of stock
Election must be made unanimously
Election must be made by 15th day of 3rd month of tax year in order to be effective for that year

Question 2

How is S/H basis for S Corp calculated?

Answer 2

Initial basis
+ Income/Gains (including muni bond interest)
- Distributions
- Non deductible, non capitalized expenses and depletion
- Loss and deductions

Question 3

How is allocation of income calculated in S Corp?

Answer 3

Average Daily Basis =
Annual income/365
x # of days
x % stock owned

Question 4

What are separately stated items?

Answer 4

Capital G/L
Section 1231 G/L
Section 179 deduction
Rent and royalty income
Charitable contributions
Interest income
Foreign income taxes
Investment interest expense
1/2 entertainment expense

Question 5

How are distributions in S Corps treated?

Answer 5

Treated in this order:

1) AAA - not taxable
2) AEP - taxable dividend
3) Return of capital - not taxable
4) Gain from sale of stock

Question 6

What is the Accumulated Adjustment Account?

Answer 6

The cumulative total of undistributed net income items for a S Corp
Already been taxed to S/H

Question 7

How can S Corp status be terminated?

Answer 7

Terminate - >50% vote

If have passive income > 25% of gross receipts for each of 3 consecutive years and was C Corp with AEP

Question 8

What is the Built-In Gains Tax?

Answer 8

Applies if C Corp elects S status and FMV of its assets > bases
Difference is net unrealized built-in gain
If assets sold within 5 years, tax at highest corporate rate applies