S Corporations Flashcards
What condition will prevent a corporation from qualifying as an S Corporation?
- The corporation has both common and preferred stock. An S corporation can only have one class of stock outstanding.
- A qualifying S corporation can have no more than 100 shareholders. A husband and wife are counted as a single shareholder without regard to how they hold their shares.
- The S corporation election must be made by a qualified corporation with the unanimous consent of all shareholders.
- All shareholders must be individuals, estates or certain defined trusts (not a partnership as a stockholder).
- An S corp cannot have a C corp shareholder.
- S corporations that are former C corporations with undistributed C corporation earnings and profits are restricted in the amount of passive investment income they can realize without terminating their S election. The restriction is 25 percent of total gross receipts from passive investment income. The S election is terminated if the S corporation has passive investment income greater than 25 percent of gross receipts for three consecutive years. After three years with 90 percent of its gross receipts from passive sources, Bristol will lose its S corporation status on the first day of the next taxable year.
What is the earliest date a corporation can be recognized as an S corporation?
An S corporation election made by the 15th day of the third month of the year (March 15th) can be retroactive to the beginning of the year (January 1st. Any election made subsequent to that date is effective as of the first day of the next year.
How does revocation of an S Corporation work?
An S corporation may have only one class of stock. A difference in voting privileges (i.e., voting and nonvoting common stock) does not constitute another class of stock, and they are combined for S election (and revocation) purposes. Rule: The election for an S corporation is revoked on the date when over 50% of the shareholders elect to revoke.
If a company terminates its S corporation status for the current year, when can the company reelect S status?
The S corporation cannot reelect S status until the fifth year from the current year.
What is the deductibility of fringe benefits such as health insurance for S corporation shareholders?
The value of fringe benefits such as health insurance is includable in the gross income of S corporation shareholders who own more than 2% of the S corporation’s stock (unless the S corporation does not deduct the cost of such benefits).
What is the tax rate for an S corporation that pays tax on built-in gains?
The tax rate for the built-in gains tax is 21%, which is the highest corporate income tax rate.
Is entertainment expense deductible?
No
How many classes of stock can an S corporation have?
One
Who can be a shareholder in an S Corporation?
Shareholders of an S corporation must be individuals, estates (including a bankruptcy estate), a voting trust, or a grantor trust.
After a corporation’s status as an S corporation is revoked or terminated, how many years is the corporation required to wit before making a new S election, in the absence of IRS consent to an earlier election?
After a corporation’s status as an S corporation is revoked or terminated, the corporation is required to wait 5 years before making a new S election, in the absence of IRS consent to an earlier election.
Who is not allowed to be shareholders of an S corporation?
C corporations and partnerships are not allowed to be shareholders of an S corporation.
