S Corporations

Question 1

S Corporation

Answer 1

A closely held corporation that, upon meeting certain qualifications, elects to be treated as a pass-through entity for tax purposes such that its income is not taxable to the corporation, but each shareholder is taxed on a proportionate share on a Schedule K-1.

Question 2

Qualifications for S Corporation Status

Answer 2

In order for a corporation to elect S corporation status it must have (Simple & Small):

• Only one class of stock, with profits and losses allocated proportionately according to ownership (Simple).
• No more than 100 shareholders, with family members and their spouses being treated as a single shareholder, all of whom must be U.S. residents or citizens and natural persons—thus, entities, other certain trusts, estates, and tax-exempt corporations, may not be shareholders (Small).

Question 3

Separately Stated Items

Answer 3

Items that are reported separately on the tax return of an S corporation (1120S) because of their tax treatments, enabling shareholders to each recognize their proportionate share of each item and handle it properly on their tax returns. They include capital gains and losses, Section 1231 gains and losses, dividends and interest, passive activities, charitable contributions, Section 179 depreciation elections, and tax credits.

Question 4

Passive Investment Income

Answer 4

Gross receipts derived from dividends, interest, royalties, rents, annuities and gains from sales of securities.

Question 5

Accumulated Adjustment Account (AAA)

Answer 5

An account maintained to keep track of undistributed income and loss items for which the shareholders have already been taxed so that distributions can be distinguished between those that are taxable to shareholders and those that are distributions of income that have already been taxed. Amounts received out of AAA are not taxable when distributed.

Question 6

Built-In Gains Tax

Answer 6

A tax, calculated at the highest corporate tax rate, imposed on gains on disposals of assets that have appreciated prior to a tax-free conversion from a C corporation to S corporation status when those assets are sold within 5 years of the conversion.

Question 7

Qualified Business Income Deduction

Answer 7

A 20% from-AGI deduction for qualified businesses (i.e., certain nonservice, flow-through entities, but includes engineering and architecture businesses) to help equalize the tax benefits received by corporations due to a reduced flat tax rate of 21% enacted by TCJA in 2017, calculated as 20% of qualified business income (QBI), subject to a Wage/Property Limitation, which is the greater of 50% of wages, or 25% of wages + 2.5% of unadjusted basis of qualified property.

• QBI—generally ordinary business income/deductions, but NOT compensation paid to owners for services, cap gain/losses, dividends, or interest income other than business interest income.