S corps

Question 1

What is the maximum amount of passive investment income that S corp will be allowed to earn and still qualify as an S corp?

Answer 1

No limit. S corporation status is terminated if the corporation has had passive investment income in excess of 25% of gross receipts for 3 consecutive taxable years and has had Subchapter C earnings and profits at the end of each of those taxable years.

Question 2

A new S election can be made without IRS consent after how many years after a revocation or termination of an S election.

Answer 2

Any corporation that terminates its S election will not be eligible for reelection for 5 years, beginning after the first taxable year in which the termination was made, unless IRS consent is given.

Question 3

The S corporation status can be revoked only if the shareholders who collectively own more than what percentage of the outstanding shares in the S corporation’s stock consent to its revocation?

Answer 3

S corporation’s status may be revoked by an election of the shareholders holding more than half of the shares of a corporation.

Question 4

The S corporation election is effective for the current tax year if it is made on or before:

Answer 4

within 2 1/2 months or March 15 for calendar-year corporations

Question 5

How many shareholders must consent to the S election?

Answer 5

All shareholders must consent to the election.

Question 6

An S corp cannot have more than how many shareholders?

Answer 6

No more than 100

Question 7

Shareholders of an S corp may only be?

Answer 7

Individuals, estates, qualified trusts, banks, and certain tax exempt entities.

Question 8

What taxable year is the S corp required to use?

Answer 8

An S corp is required to use a calendar year unless it establishes a business purpose for using another year and the IRS consents.

Question 9

The amount of losses and deductions an S corporation shareholder can claim is:

Answer 9

limited to the adjusted basis of the shareholder’s stock.

Question 10

What are S corps Separately stated items?

11

Answer 10

Portfolio interest/dividend income
Capital gains and losses
Gain or loss from I/C due to casualty or theft
1231 gains or losses
Charity contributions
179 expenses
Tax exempt income and associated expenses
Investment income and expenses
Foreign taxes
Passive income or loss items
Meals/entertainment subject to the 50% cut back rule

Question 11

How to calculate shareholders basis?

Answer 11

BOY STOCK basis
(+) Sep Stated & Non - Sep stated items of income
=Basis available for distributions
(-) Distributions
=Basis available State & Non sep stated subtraction items
(-) Non deductible items
(-) Losses and deductions
=EOY stock basis

Question 12

The amount of each item that each shareholder takes into account is computed on:

Answer 12

a per-day, per-share basis. Only upon termination of a shareholder’s interest during the year may an election be made to allocate items according to the books and records of the corporation instead of by daily proration.

Question 13

Penalty is imposed on an S corporation for failure to file an S corporation return within 2 1/2 months of the end of the tax year. The penalty is imposed in the amount of

Answer 13

the number of persons who were shareholders during any part of the year, multiplied by $195 for each of up to 12 months (including a portion of one) that the return was late.

Question 14

Do wages paid affect basis?

Answer 14

No, wages paid do not affect basis.

Question 15

Distributions decrease what?

Answer 15

Decreases basis. Distributions will be tax-free to the extent of their basis in the S corporation.

Question 16

If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder

Answer 16

Distribution from an S corporation with no Subchapter C earnings and profits is treated as a tax-free return of capital to the extent of a shareholder’s basis in his or her stock of the corporation, decreasing the stock’s basis. Excess is treated as gain or loss on the sale of the stock.

Question 17

What are the AAA ordering rules?

Answer 17

Balance at BOY
+Items of income and gain
(-) S/NS items of loss and deduction
(-) Distributions

*Losses can create negative AAA. Distributions can never create negative AAA.

Question 18

Distributions from an S corporation to its shareholders are deemed to affect shareholders in the following order:

Answer 18

AAA
E&P
Return of capital

Question 19

An S corporation that, upon conversion from C to S status, had net appreciation inherent in its assets is subject to

Answer 19

is subject to a built-in gains tax of 35% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period.

Question 20

The tax on the excess net passive income (ENPI) of an S corporation is

Answer 20

is the ENPI times the highest corporate tax rate (35%).

Question 21

What are the eligibility requirements to become an S corp?

Answer 21

Domestic corporation
100 or fewer shareholders
Only individuals, estates, and certain trusts are permitted shlds. 
Cannot have more than 1 class of stock. 
Must be US citizens or residents.

Question 22

S corp termination can be done in 3 ways:

Answer 22

Voluntary revocation of S corp election
Ceasing to be a small business corp
Excess passive investment income.

Question 23

If voluntary revocation, what %age must consent?

Answer 23

Can only be made with consent of shldrs who at the time of revocation is made, hold more than 50% of the I/O stock.

Question 24

S corps file form___________on______:

Answer 24

1120 S on the 15th day of the 3rd month.

Question 25

Shareholders share of S corp losses is limited to:

Whose losses carry over:

Answer 25

AB in the stock of the corporation and indebtedness of the corporation to the shldr.
Losses disallowed under this rule carry over indefinitely.

Question 26

When an S corp distributes property, the amount of the property distribution will be:

Answer 26

FMV of the property and a shldr will take a FMV basis in distributed property.
Shldr’s stock basis will also be reduced by the FMV of the distributed property.

Question 27

How are distributions with E&P treated?

Answer 27

1st tier- distribution is nontaxalbe to the extenet of AAA
2nd tier- taxable dividend to the extent of E&P
3rd tier- nontaxalbe reduction of remaining stock basis
4th tier-thereafter as a capital gain from the deemed disposition of stock.

Question 28

What is the tax rate for the built in gains?

Answer 28

The tax rate for the built-in gains tax is defined by statute to be the highest corporate income tax rate.

Question 29

The tax on the excess net passive income (ENPI) of an S corporation is calculated how?

Answer 29

The tax on the excess net passive income (ENPI) of an S corporation is the ENPI times the highest corporate tax rate (35%). Thus, the tax is $35,000 ($100,000 × 35%).

Question 30

What is built in gain calculated on?

Answer 30

An S corporation that, upon conversion from C to S status after 1986, had net appreciation inherent in its assets is subject to tax of 35% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period. If an asset it AB 20 FMV 30 sells for 35. BIG is 30-20=10*.35=3.5 Sales price is irrelevant.