S Corporations

Question 1

When an S election is made, when does it become effective?

Answer 1

If election made by March 15 (2 1/2 months) will be effective for that tax year
If made after March 15, does not become effective until the start of following tax year and will be considered a C corp until then (AEP)

Question 2

Calculation for allocating income in an S corp?

Answer 2

Income
/ 365 days (or 360)
/ shares out
x shares owned
x number of days owned
= allocated income to shareholder

Question 3

List the separately stated items

Answer 3

Cap gains/losses
Section 1231 gains
Sec 179 depreciation
Rent & royalty income
Charitable contributions
Interest income/expenses on investments
Tax exempt interest income
Foreign income
G/L from sale of collectibles

Question 4

What are the conditions for S corp election?

Answer 4

• No more than 100 shareholders (spouses treated as 1 share)
• Shareholders must be individuals
• Must be domestic corp
• Can only be one class of stock (can have voting/nonvoting, but income must be allocated evenly)
• S corp can own stock in C/S or be a partner, but C corp can’t be share in S corp

Question 5

S corp basis calculation

Answer 5

Initial basis
\+/- % income/loss
\+ Muni bond interest 
\+/- Separately stated items
- Distributions received 
= Net basis

Question 6

Distributions to shareholders rules

Answer 6

Nontaxable to the extent of AAA (AAA= money earned as an S corp that was already taxed on K-1)

1. AAA is nontaxable (limit to share basis in stock; AAA computed at yr end, not when dist made)
2. AEP is taxable
3. Basis is nontaxable
4. Gain - cap gain

Question 7

Explain passive investment income rule for S corps

Answer 7

S corp will terminate if:

1. Passive income > 25% gross receipts for last 3 consecutive years AND
2. For these 3 years, corp had AEP from c status
   * * Term is effective first day of 4th taxable year

Question 8

What are the instances in which an S corp pay taxes at the corporate level

Answer 8

1. Excess passive investment income
2. LIFO Recapture
3. Built in Gains by S corp
   * * 1 and 2 only apply if was previously a C corp

Question 9

Rules for fringe benefits provided to shareholders/employees

Answer 9

Benefits provided to 2%+ share/EE are included in share gross income and deductible
Accident/health premiums paid by S corp for 2%+ share/EE are deductible by S corp and included in income of share but not treated as wages for FICA

Question 10

After a corporation’s status as an S corporation is revoked or terminated, how many years is the corpora­tion required to wait before making a new S election

Answer 10

The general rule is an S corporation must wait 5 years after their status as an S corporation is revoked or terminated.

Question 11

How is built in gain taxed?

Answer 11

When convert C to S corp, tax on net appreciation of assets owned at conversion if sold w/in 5 years
At conversion: FV 85 basis 40=45 unrealized BIG
When sold: price 95 basis 40=55 realized gain
Lower of unrealized BIG and realized gain=45
times highest corp tax rate (35%) = 15,750 BIG tax

Question 12

Is the incorporation of an S corp a nontaxable event?

Answer 12

Only to the extent that liabilities on assets contributed are not in excess of the shareholder’s bases in the assets

Question 13

How to calculate basis in shares of an S corp incorporation exchange (80% control after exchange)

Answer 13

Basis in the shares is equal to the adjusted basis in the assets contributed LESS THE DEBT RELIEF (basis can’t go below zero, so gain recognized if not enough basis)
* Debt is treated as boot for basis calc, but NOT as taxable boot

Question 14

Calculate basis of share when assets and services are contributed to S corp

Answer 14

Equal to adjusted basis of asset plus the amount recognized as ordinary income for contribution of services

Question 15

good calculation for allocating income for an S corp

Answer 15

Allocate 73,200 x 40/366 [for pro rata share of 100% ownership for 40 days out of the 366 for the year]
Allocate 73,200 x 75% x 326/366 [for pro rata share of 75% ownership for 326 days out of the 366 for the year]

Question 16

What section of the tax code is S corp treatment?

Answer 16

1361-1379

Question 17

When S corp terminates, how to allocate income?

Answer 17

If election made (100% of shareholders) income or loss can be allocated between the two years based on the books (called “Temporary Closing of the Books”).
If no election, daily allocation must be made

Question 18

How is the basis of a shareholder affected when s corp makes a distribution and they have AEP?

Answer 18

Basis is reduced by the distribution from AAA, but not by the distribution from AEP bc its taxable income. If in excess of AEP, return of capital will reduce basis

Question 19

What adjusts the AAA?

Answer 19

amounts of the corporation’s income, net of deductions, that has not been distributed to shareholders. This may include interest and dividends. Neither capital contributions nor distributions are income or deductions to the corporation. Charitable contributions would decrease the AAA.