S Corps

Question 1

List the requirements for an S Corporation status.

Answer 1

Nonresident aliens, partnerships, and most trusts cannot be shareholders;
Only one class of stock is outstanding (voting and nonvoting is OK).

Question 2

What rules apply for the contribution of property to an S Corporation?

Answer 2

Control club (80%) rules apply (corporation rules.)

Question 3

What circumstances may cause a termination of S Corporation status?

Answer 3

Majority vote of all shares;
Violation of an eligibility requirement;
Violation on limit of passive investment income for three consecutive years.

Question 4

After termination of an S Corporation, when may a company make a re-election for S Corporation status?

Answer 4

Cannot be re-elected without IRS permission for 5 years after termination.

Question 5

List the types of trusts that can be stockholders in a corporation.

Answer 5

Estates;
Grantor trusts where grantor is alive;
Testamentary trusts within 2 years after death;
Special stock voting trusts (all beneficiaries are shareholders);
Qualified S trusts (all beneficiaries are shareholders);
Small business electing trusts;
Exempt entities.

Question 6

List the characteristics of an S Corporation.

Answer 6

Shareholders not liable for debt;
Shares freely transferred;
Shareholders can be employees;
Flow-through taxation.

Question 7

What corporations are ineligible for S Corporation status?

Answer 7

Most subsidiaries;
Financial Institutions;
Domestic International Sales Corporations (DISCs);
Foreign corporations.

Question 8

What must occur for an S Corporation status to be elected?

Answer 8

Must be unanimous.

Question 9

List some characteristics of an S Corporation’s corporate tax.

Answer 9

Not entitled to some corporate deductions (i.e., Dividends Received Deduction);
Do not pay alternative minimum tax;
Do not pay personal holding company tax;
Do not pay accumulated earnings tax.

Question 10

How are losses and gains recognized for corporate taxes on property distribution?

Answer 10

Corporation generates gains by distribution of appreciated property;
Gain is passed through to shareholders. Losses are not recognized.

Question 11

What items increase a stockholder’s basis in an S Corporation?

Answer 11

Additional contributions;

Share of corporate and exempt income.

Question 12

What items decrease a stockholder’s basis in an S Corporation?

Answer 12

Distributions from accumulated adjustments accounts;

Share of nondeductible expenses and corporate loss.

Question 13

What options does an S Corporation have for taxable years?

Answer 13

Calendar year is default;
May use fiscal if used by more than 50% of shareholders;
Can elect a fiscal year with IRS permission if business reason.

Question 14

What tax effects do shareholder-employees of a corporation need to consider?

Answer 14

Imposed on greater than 2% shareholders on any day during year;
Fringe benefits are included in income. Accident and health premiums are included as fringe benefits.

Question 15

What forms are used to report S Corporation income?

Answer 15

Report taxable income on Form 1120S;

Report separately-stated items for each shareholder on schedule K-1.

Question 16

List the four loss limits on S Corporation shareholders.

Answer 16

Adjusted basis of stock;
Adjusted basis of loans to corporation once stock basis exhausted;
May only deduct losses to extent at risk;
Passive loss limits.

Question 17

What is the tax rate that is applied to built-in gains income?

Answer 17

Highest statutory corporate income tax rate.

Question 18

What does the accumulated adjustment account include?

Answer 18

Includes all income and expenses of S corporation except for tax-exempt income and related expenses.

Question 19

How are shareholder gains on distributions calculated?

Answer 19

Cash + Value of Property Received - adjusted basis of stock

Question 20

What effect does an S Corporation distribution have on earnings and profits?

Answer 20

Dividend income to extent of earnings and profits;
Reduces basis in stock; no income;
Any excess is capital gain.

Question 21

What is the income effect on an S corporation of the distribution of property?

Answer 21

Gains are recognized for appreciated property; losses are not recognized.